Bank economist says that interest rates may fall to zero

The chief economist of the Bank of England has said that UK interest rates are as likely to fall still further, from the current historic low of 0.5 per cent, as they are to rise.

Andy Haldane, member of the Bank’s Monetary Policy Committee, said that he couldn’t see a strong argument for either raising or lowering the rate.

Interest rates in the UK were lowered to 0.5 per cent in March 2009 and have remained at that level since.

Interest rates had been expected by experts to increase at some point later this year or early next year. The Bank hinted, however, in February of this year that it was prepared to cut rates still further if the economy needed extra stimulus.

Andy Haldane was speaking at a business lunch in Rutland and in a personal capacity rather than as a spokesman for the Monetary Policy Committee (MPC). During the lunch he said that if a computer program decided interest rates rather than the MPC, then interest rates would be reduced to zero per cent for twelve months or so.

Sterling suffered a sharp fall against the dollar following Mr Haldane’s comments. At one point, it fell by as much as 1.5 per cent although it has since recovered slightly.

During his speech, the MPC member said that the current low level of interest rates is due, in part, to continued low economic growth. Whilst the situation has improved slightly over the past two years, with growth being a little stronger than expected, inflation has failed to rise as much as the Bank forecast, particularly during the past twelve months. It is currently at an all-time low of 0.3 per cent.

The MPC believes that inflation will continue to remain close to zero in the short term, taking two years to rise to the government’s target figure of 2 per cent.