Bank of England to cut to zero?

From Bloomberg,predictions of possible zero rates to come - everyones a winner in the free money game.Deja vu anyone?

King May Consider Most Radical BOE Cuts Since WWII (Update2)

By Brian Swint
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Nov. 6 (Bloomberg) – 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.

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.

Zero Rates

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.

The U.K.'s economy will probably be the worst performer in the G-7 next year, with the European Commission forecasting a contraction of 1 percent. The euro-region will grow 0.1 percent, the U.S. will contract 0.5 percent and Japan will shrink 0.4 percent, the Nov. 3 predictions show.

Rates Burden

Consumers and executives are also saddled with the highest rates, with the Bank of England’s benchmark comparing with the Federal Reserve’s 1 percent rate.

With our rate at 4.5 percent, it really is crazy,'' said Roger Bootle, founder of Capital Economics Ltd. in London. Rates have got to get down to around 1 percent, and they’ve got to stay there. I don’t rule out zero.‘’

The Fed’s interest-rate cut last week has helped bring down the rates at which banks lend to each other. The London interbank offered rate, or Libor, for three-month dollar loans fell to 2.51 percent yesterday from 4.82 percent on Oct. 10. The rate is still 151 basis points more than the Federal Reserve’s benchmark rate, compared with an average of 22 basis points in the five years before the global credit crisis began in August 2007.

Deteriorating Outlook

Reports this week have shown the U.K. economy’s downturn is worsening, prompting some economists to revise their forecasts for today’s decision and predict a bigger cut. Factory output dropped in September, extending the worst streak since 1980, the statistics office said yesterday. Services from banks to recruiters contracted the most since 1996.

Monetary easing needs to step up a gear'' after terrible’’ data, said George Buckley, an economist at Deutsche Bank AG, who had forecast a 50 basis-point cut. ``The escalation of the economic slowdown justifies, in our view, a full percentage point off interest rates.‘’

U.K. house prices fell 14.9 percent from a year earlier in October, HBOS Plc said today, the most since the index started in 1983. Property values, which tripled in a decade, will fall 30 percent from their October 2007 peak over three years, Fitch Ratings said yesterday.

Output Drops

The U.K. economy shrank 0.5 percent in the three months through October, the National Institute of Economic and Social Research said in a report today. Output is now lower than it was a year ago, the first annual drop since 1990, the report showed.

Slowing growth and plunging oil prices are also likely to push inflation, which accelerated to 5.2 percent in September, back toward the central bank’s 2 percent target. The Bank of England said in August that inflation could undershoot that goal in two years. The central bank publishes updated forecasts on Nov. 12 in its quarterly inflation report.

I don't think anybody believes this cut will be the end of it,'' said Saunders, who predicts rates will probably fall to 2 percent. The U.K. had one of the biggest credit and housing booms and the biggest drop in savings, so that makes us more exposed to the unwinding of it all.‘’

To contact the reporter on this story: Brian Swint in London at
Last Updated: November 6, 2008 04:34 EST

Unbelievable -theyve cut rates by ONE AND A HALF PERCENT :imp:

Almost there!

Wow, those fellas don’t mess around do they?
Have to ask wtf were they doing before leaving them so high?

‘so high’? what planet are you on? :unamused:

you consider real interest rates of ~1% as high :open_mouth: :confused:

Cant wait for the ECB decision at 1pm.The cannies will be laughing now. :imp:

Really wasn’t expecting this. Likelihood is they are trying to force banks to pass on rate cuts, which they have been refusing to do.

Would still be surprised to see ECB do more than 50bps, but will be ready for it.

Why have they done it (other than to control inflation) - surely such a big cut is a bad thing given it could result in even more unsustainable credit or will banks base their rates on libor.

oddly the eur/gbp rate has gone in GBP’s favour? expecting europe to drop even more? … =undefined

The ECB are acting like a preverbial stripper,teasing the markets by only cutting a half,when everyone knows they are going to see the lot later,who do they think they are fooling?

If the fx markets completely lose patience with them it could cause a collapse in the Euro.I’m sure they know what they are doing :confused:

How does this sit with your “inflate-away” theory???

Maybe, just maybe, they’re dropping rates because deflation is the greater risk now? Maybe they held out longer and dropped less than the others because they were concerned about inflation in the recent past.

Maybe, just maybe, they are actually trying to stick to their mandate of price stability, at least over the medium term.

ZIRP does nothing to stop a credit-bust caused deflation. It actually feeds and prolongs it. And with punters maxed out on debt and the wholesale destruction of liquidity in the derivatives markets, trying to engineer a high inflation period to inflate away all the debt just won’t work (sorry, Professori. I agree it’s what they are trying to do, I just don’t think it will actually work)

Looks like Ireland, the UK and the US are all going Japanese.

And the only solution to a Japanese scenario is to keep rates at at least real-neutral. You have to flush out the debt overhang before anything will start moving again.

This is bloody stupid.

Couldn’t agree more. The rate-slashing zealots in the media don’t realise that what is different this time is that the banks have run out of money to lend and the punters have already borrowed way beyond their limits. Even if all the major banks cut their respective base rates to zero, it will not stave off a recession. Lenders are not going to lend and borrowers are not going to borrow.

But it will stave off debt induced poverty and reduce the numbers defaulting on their repayments.

(disclaimer) I am not an economist!

Only if lenders pass on those cuts which many won’t.

Except it won’t, because the banks are wildly under-capitalised and will not reduce the rates they are charging to anywhere near zero. They need income, badly.

We have nearly 20 years of Japanese data to go on with this one. All ZIRP did was to keep the loans on the books, endlessly rolled over, non-performing loans providing very little income to the banks and never really getting paid down or written off. All those loans will have the interest component serviced for the next decade, but very little of the capital ever repaid. And so the banks stumble on, Zombie Banks they called them in Japan. Low on capital, with huge debts already out there never being repaid, so they simply couldn’t advance new loans to productive industry (and the punters had no appetite for loans either).

If the loan cannot ever be paid off then it needs to be written off. If people are paying only the interest component then they need to be “encouraged” to clear some of the principal. And yes, this does mean a delfationary period, which is the inevitable result of a credit binge. But by tackling the problem head-on, you might get back out of the deflationary period in about 3 years and back to a reasonably stable financial system which isn’t weighed down by vast amounts of toxic debt, so it can start lending to businesses again and the whole systam can unfreeze.

There’s not other way around it that I can see, though doubtless the geniuses in charge will come up with all sorts of jolly wheezes to try and finagle their way out of the mess. Which will, in the end, only make things more painful and more prolonged.

Rate adjustments fall into 3 categories IMO

  1. Rate increases to dampen inflation, cool markets, avoid bubbles.

  2. Rate reductions to avoid deflation, induce markets, increase economic activity

  3. Market induced adjustments to instill confidence.

    1 & 2 function effectively only when economic activity is stable.

This latest one falls into the lattrer category and does not imply that there will be any significant effect on the markets or economy, pressured banks may not pass it on and may not benefit fully from it themsleves if their cost of borrowing does not fall accordingly. It seems like central banks worldwide are capitulating to the fact that this recession will be long, deep, and nasty. The current adjustments seem like last gasp efforts to offset inflationary pressures before we all sail off into the abyss of worldwide recession or stagnation. That can only lead to inflation long term but the powers that be would prefer to defer it until later only making it worse when it hits.
Why would China now buy foreign reserves of either the US or UK when they need the money themselves to fight the recession domestically? Similarly, citizens without debt are being given a stark set of options, keep cash deposits in cash at negative real yields, invest at risk, or purchase good, services, or assets boosting the economy but at the risk of depreciating value. Those with debts fare better if they cna gain some cost of money benefits and work to reduce their debt more quickly.
No matter, economic activity has to slow and the consequences could be dire.

As long as a country has a trade surplus, they need to spend the notional cash of that surplus on something. As China prices in dollars in the main, it has a surplus of dollars, so it has been parking its export surplus in dollar denominated paper. If the yuan was an internationally traded company, then it is possible that China would be trading in it, but I don’t think that makes much sense for it, as foreign countries would have to buy yuan to pay China, so the net effect would be the same.

Or am I talking bollocks!? You just never know.

Anyway, my supposition is that China is building up its war-chest so it can continue to purchase commodities from the rest of the world even if its exports collapse in a heap with the US and european economies.

I don’t think that this will cure all of the debt that hangs over society.
I’m espeically mindful of the Cannies and their BTL properties.
Even if the amount that they have to pay back per month remains static or falls slightly on one of their properties, with rents continually decreasing and the number of rental properties continually increasing, (trending to 20,000 available rent by Christmas according to Daftwatch) for a lot of these people will probably be in a “poverty” trap, i.e. poverty by their definition,

I just cannot believe that some of the banks aren’t pushing the mark on certain BTL owners who haven’t paid their mortgages for so long now, of course, as I write this, I realize that many of those loans have been converted to Interest Only.

Damn it.
Where is the Financial Leadership in this country?