Assetz® News - Base rate of zero could happen, says MPC member

Base rate of zero could happen, says MPC member

18th December 2008 |

This week saw the US Federal Reserve undertake a radical move that brought echoes of the monetary policies pursued in Japan in the 1990s, when the Land of the Rising Sun suffered a long and persistent recession. America's central bank decided to slash the federal funds rate from one per cent to a range between zero and 0.25 per cent, adding that the rate may have to stay very low for an extended period of time.

Many will wonder if such a move could happen here. After all, at two per cent, the Bank of England base rate is already as low as it has ever been since the institution was established in 1694, with the sole instance of a few months in 1951 matching the present figure. With three per cent slashed off the base rate in three months, many will wonder just how low it will go and those investing in property will be interested by the possibility that mortgage rates could come down as a result, not to mention the possibilities of recovery in the property market and the wider economy.

The answer, it appears, is maybe. In an interview with the Financial Times, Bank of England deputy governor Charles Bean, who sits on the monetary policy committee (MPC), said that this is indeed a "possibility". He cautioned against the "excited" speculation in parts of the press that such a fall in the rate could happen as soon as next month, but indicated that it may be only a matter of time.

He stated: "The bank rate is still at two per cent, so we still have some margin to go yet, but of course we may find ourselves getting them all the way to near zero."

Professor Bean added that there are some technical problems associated with a zero rate, commenting: "The problem with going to zero is that effectively you don't leave the banks very much incentive to manage their own liquidity." But nonetheless, the fact that such a move has been acknowledged as possible may get potential borrowers very interested.

While it may be a bit excessive to anticipate a cut to nil next month, the possibilities of a happy New Year for mortgage seekers (and a very happy one for those on tracker rates) could still be substantial. This was the view expressed yesterday by the Ernst & Young Item Club, following this week's publication of the December MPC meeting minutes. Senior economic advisor to the club Hetal Metah said: "The minutes clearly suggest that rates will fall further in the coming months, with the Committee using the minutes to signal their intentions to the markets. Item expects a further rate cut of 100 base points [one per cent] in January, with further cuts likely unless the MPC see clear evidence that the severity of the recession is easing."

So while a zero rate may still be some way off (should it happen at all), it may be that the base rate will be halfway there from its present position in a few weeks' time. Those looking to borrow to invest will hope that any such cut translates into lower mortgage costs.