Bank of England Could Keep Cutting to 0%

The Bank of England's Monetary Policy Committee cut interest rates by a surprising 150 basis points, the deeper cut since the bank became independent in 1997, to help the economy fend off a recession.

After an emergency coordinated 50-basis-point cut last month to 4.5 percent, the question now is how low will they go?

"The Japanese went down to 0 percent and there is no reason why America and the UK might not have to go down as far," former MPC member Professor Charles Goodheart told CNBC.

Most economists expect the Bank of England to follow the U.S. Federal Reserve's lead and cut by a half point, which would take their benchmark rates to 4 percent.

But there has been increased speculation that it may reduce rates by as much as a full percentage point and surprise the market. If it did, it would be the first time since four cuts that size in 1992-93 when the UK economy was last in a deep recession.

The Bank of England's decision is seen as less predictable than the European Central Bank's, partly because British interest rates are still at a higher level and have more room to go lower. In addition, mortgage lenders were slow to pass on previous rate cuts in full to hard-pressed homeowners and consumers.


Earlier this week HSBC warned that it would that it may not pass on a reduction in borrowing costs if the Bank of England does indeed cut. UK lender Abbey also announced this week that it was raising its tracker mortgage rate.

As the focus of the financial crisis shifts to the effects on the real economy, many industry bodies and retailers have been clamoring for moves in interest rates.

Marks and Spencer's Chief Financial Officer Ian Dyson told CNBC that rate reductions would clearly help, although "how quickly that will feed through to consumer sentiment is another matter."

Meanwhile, Ryanair CEO Michal O’Leary took the opposite view saying: :"I am very worried when politicians run around saying interest rates should be zero, interest rates should never be zero, it should cost you money to borrow money."

The European Commission forecast Monday that Britain's economy will slump by 1 percent next year.

But one force that could restrain the Bank of England, at least for the time being is the low value of the pound. Lower interest rates would make the pound less attractive and could also stoke inflation by making imports more expensive.