Deflation threat could prompt more rate cuts

13 November 2008

City analysts believe the Bank of England could send interest rates to the lowest level in its history in the new year as the institution battles to prevent the recession from pushing the economy into deflation, reports say.

Following this month's 1.5 per cent cut, many experts now expect the Bank's monetary policy committee (MPC) to make a further single-point reduction next month, before sending the base rate to one per cent early in 2009, the Guardian said.

Interest rates have not been below two per cent since the Bank was established in 1694, the newspaper added.

However, market observers believe such a move may now be necessary as growth deteriorates across the economy and inflation threatens to undershoot the government's target of two per cent.

Yesterday (November 12th), the Bank's governor Mervyn King said the MPC was "certainly prepared to cut the base rate" to prevent price deflation.

ING Financial Markets analyst James Knightley told the Guardian: "We have been expecting rates to fall to two per cent by January, but we now favor rates falling further to one per cent."

The base interest rate currently stands at three per cent.

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