Bank of England Governor Mervyn King may have to consider the most radical round of interest-rate cuts since World War II as the financial crisis tears through Britain’s economy.
The central bank may need to lower its benchmark rate to zero from the current level of 4.5 percent, say economists including former policy maker Charles Goodhart and Citigroup Inc.’s Michael Saunders. The bank will probably move a step closer when it announces its next decision at noon in London, with economists expecting a cut of at least 50 basis points.
“Rates will go down a long way,” said Saunders, chief western European economist at Citigroup in London. “They should be prepared to go to zero.”
The Bank of England’s main rate is still the highest among the Group of Seven nations even as evidence mounts that the economy has sunk into a recession. Manufacturing is in the worst slump since the early years of Margaret Thatcher’s government, house prices fell the most since 1991 last month and commercial banks are refusing to pass rate cuts on to consumers and businesses.
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The Bank of England, which participated in an emergency reduction with six other central banks last month, will probably cut its benchmark to 4 percent today, said 45 of the 60 economists in a Bloomberg News survey.
Nine predict a cut of 1 percentage point and six said the bank will reduce by 75 basis points. The U.K.’s benchmark rate hasn’t been cut by more than 50 basis points since 1993, when the U.K. Treasury set monetary policy.
“Interest rates will go down from now on,” Goodhart said in a Channel 4 television program broadcast Oct. 27. “Quite how far and how fast I don’t know. They could go to zero. They went to zero in Japan in the 1990s when they had a recession or depression that went on for a long time and was quite severe.”
The Bank of England, founded in 1694 to finance King William III’s war against France, has never cut its key rate below 2 percent, keeping it at that level through World War II.
The European Central Bank will probably reduce its main rate by 50 basis points to 3.25 percent later today, said all but one of the 55 economists in a Bloomberg survey. The ECB’s decision is due 45 minute after the Bank of England’s.