JohnCenaFan28
02-01-2009, 11:09 PM
Interest rates are set to edge closer to zero this week but economists predict the Bank of England could soon resort to more unorthodox measures to kick-start the economy.
Analysts believe the Bank will cut the cost of borrowing to a new all-time low of 1% on Thursday as it faces up to the raft of dire figures out since its last decision suggesting the UK economy is shrinking at a faster rate than policy makers had expected.
The Bank has already slashed rates to 1.5% - the lowest level in its 315-year history.
Minutes from the last Monetary Policy Committee (MPC) meeting revealed the committee had considered the possibility of leaving rates uncut in January amid fears about the fall in the value of sterling and to allow previous measures to take effect. But analysts believe the news this month that the economy shrank by a shock 1.5% in the fourth quarter of last year - the biggest contraction in almost 30 years - has left rate-cutters with little option but to go further.
Howard Archer, chief UK and European economist at IHS Global Insight, said the Bank was "under severe pressure" to cut rates by another half percentage point.
"With GDP suffering its largest drop for nearly 30 years in the fourth quarter of 2008, latest data and survey evidence largely reinforcing belief that the economy is poised to suffer in 2009 the largest single year contraction since the Second World War, credit conditions remaining extremely tight, and a period of deflation highly possible in the second half of this year, the pressure on the Bank of England to act is intense," he said.
There is increasing concern that the Bank is "running out of bullets" to combat a deepening recession as the cost of borrowing nears zero.
This has led economists to predict a bolder strategy from the Bank in coming months, raising the possibility of so-called quantitative easing - increasing the supply of money in the economy to buy assets from banks, or boosting the reserves that the banks hold on deposit in the Bank of England.
Governor Mervyn King said this month that policymakers might need to use "unconventional" tools to control inflation. He said the MPC would consider using new powers outlined in the Government's second bank bail-out.
The rescue plan will see a new £50 billion fund created for the Bank to use to buy up private sector assets. It is hoped that the move will give companies greater ability to borrow and therefore spend, boosting the economy and bringing inflation in line with the 2% target.
-Nova
Analysts believe the Bank will cut the cost of borrowing to a new all-time low of 1% on Thursday as it faces up to the raft of dire figures out since its last decision suggesting the UK economy is shrinking at a faster rate than policy makers had expected.
The Bank has already slashed rates to 1.5% - the lowest level in its 315-year history.
Minutes from the last Monetary Policy Committee (MPC) meeting revealed the committee had considered the possibility of leaving rates uncut in January amid fears about the fall in the value of sterling and to allow previous measures to take effect. But analysts believe the news this month that the economy shrank by a shock 1.5% in the fourth quarter of last year - the biggest contraction in almost 30 years - has left rate-cutters with little option but to go further.
Howard Archer, chief UK and European economist at IHS Global Insight, said the Bank was "under severe pressure" to cut rates by another half percentage point.
"With GDP suffering its largest drop for nearly 30 years in the fourth quarter of 2008, latest data and survey evidence largely reinforcing belief that the economy is poised to suffer in 2009 the largest single year contraction since the Second World War, credit conditions remaining extremely tight, and a period of deflation highly possible in the second half of this year, the pressure on the Bank of England to act is intense," he said.
There is increasing concern that the Bank is "running out of bullets" to combat a deepening recession as the cost of borrowing nears zero.
This has led economists to predict a bolder strategy from the Bank in coming months, raising the possibility of so-called quantitative easing - increasing the supply of money in the economy to buy assets from banks, or boosting the reserves that the banks hold on deposit in the Bank of England.
Governor Mervyn King said this month that policymakers might need to use "unconventional" tools to control inflation. He said the MPC would consider using new powers outlined in the Government's second bank bail-out.
The rescue plan will see a new £50 billion fund created for the Bank to use to buy up private sector assets. It is hoped that the move will give companies greater ability to borrow and therefore spend, boosting the economy and bringing inflation in line with the 2% target.
-Nova