Posted by Katherine

Today, the Bank of England announced that interest rates have been cut to 1.5% - the lowest interest rate in the Bank’s history.

UK interest rate hits record low

The move is sure to please the City, who wanted the Bank of England to slash interest rates 50 to 75 basis points today, though any cut would have made interest rates lower than any other time in the Bank of England’s 314-year history. For context, interest rates during the Great Depression only went as low as 2%.

Chancellor Alistair Darling told the Financial Times that as the rates crept towards 0%, “the operation of monetary policy has to be looked at [more closely]”. Darling also indicated that rates would not drop to zero – at least for this month.

How interest rates are shrinking

Many economists expect that interest rates will be cut in February as well, and will be delivered alongside government assurances that borrowing will stay low for a long time.

If interest rates fall too low, however, the Bank of England would lose its independence: if zero or near-zero interest rates fail to have the desired effect on the economy, the Bank would have to seek approval from the Treasury to print money to buy private and public sector assets. This would essentially force money into the economy, a process known as quantitative easing.

The danger with quantitative easing, of course, is that too much money would be forced in, switching the problem from deflation to inflation. Indeed, shadow chancellor George Osborne called comments about quantitative easing as a sign of desperation: “It can’t be ruled out as a last resort in the fight against deflation, but in the end printing money risks losing control of inflation,” he said.

Besides quantitative easing, the financial industry has asked the government to extend loan guarantees to get credit flowing back through the economy.

Furthermore, further tax cuts and government spending are now more likely to appear in the March Budget, though it remains to be seen whether even these measures would kick-start the economy or ease the fears of jittery banks.

Now that no one is arguing that the UK can avoid a recession anymore, the best that can be hoped for is that it doesn’t get worse: house prices have fallen 20% from their peak, car sales have dived and insolvent businesses are in the news every day. According to the PA, more than 75,000 people signed up for unemployment benefit in November alone.

Have you seen any benefits from the previous rate cuts? Have your say on our message boards

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