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Interest rates set to fall to record low

December 3rd, 2008 by jamie | Filed under Daily News, Money Management.

History is in the making as for the first time ever, the Government and Bank of England all but control the UK banking sector.

Until now, the powers that be have set the Bank of England interest rate, but banks and building societies have had the option of whether to follow or not.

Tomorrow, Bank of England governor Mervyn King has a chance to write his place in the history books by taking the interest rate to the lowest ever since the bank opened for trading 314 years ago.

The monetary committee he chairs has four options:

·     Leave the rate as it is at 3%

·     Cut the rate by less than 1%, for instance by 0.25% or 0.5%

·     Cut the rate by 1% to 2% – a rate last seen in 1951

·     Cut the rate by more than 1% to enter a historic new era. 

For the first time, the Bank of England governor knows his actions will not be undermined by speculators in the banks because the Government now calls the shots in several of the UK’s biggest banks after bailing them out with billions of pounds of taxpayer’s cash.

The odds are a 1% cut as the bank was looking to cut the rate by up to 2.5% last month according to minutes of their meeting.

This makes economic sense as inflation is falling and dropping the rate frees up cash for businesses making loan repayments and homeowners with mortgages – both moves stimulate spending that is so badly needed to shift the country out of recession.

Retailers are falling like dominoes in the high street with manufacturing and construction in dire straits.

Cutting the interest is the single act that will promote a ‘feel good’ factor in the economy and put more money in people’s pockets rather than the paltry cut in VAT.

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