Bank rate and inflation 'to fall'

By Paul Lewis BBC Radio 4's Money Box

The UK has not experienced deflation since 1933

The UK's official bank rate could fall below 2% as the government struggles to avoid a recession.

If so that would be the lowest it has been since the Bank of England was founded in 1694.

Economist Roger Bootle predicts a fall to 3.5% by Christmas and 2.5% or 2% by spring and lower if "things get really bad".

He also says that inflation will "plummet" next year and could even fall to zero or below.

Dramatic prediction

Roger Bootle told Money Box on BBC Radio 4

"We are going to see some dramatic falls in interest rates.

"The low point in recent years was 3.5% and we weren't in anything like the pickle we are now.

"But it has to get an awful lot lower - 2% is the all time low for Bank rate and I suspect we'll get to something like that, but if things get really bad why can't they get lower?"

If the medicine is not that effective you have to use a bigger dose Roger Bootle

"I would certainly see half a point off by Christmas and maybe 1% off.

"And if the news continues to be grim we'll see further falls in the early months of next year.

"If the medicine is not that effective you have to use a bigger dose - so it wouldn't surprise me if we see 2.5% or 2% by the spring."

Income fears

Such rates could slash the incomes of many retired people who live partly on the interest on their savings.

One Money Box listener wrote to the programme:

"If investment rates fall as is now predicted, I am one of possibly hundreds of thousands of pensioners, who will find their returns from building societies reduced by as much as three quarters.

"We rely on the current level of interest to make ends meet, and large numbers will be faced with being unable to meet living costs, particularly fuel and council tax."

It wouldn't take much to push it below the zero line Roger Bootle

"Inflation has been very high, but it is set to plummet.

"Oil is less than half what it was at the peak, wheat prices are a third what they were.

"The commodity price shock is going into reverse.

"And we surely all believe recession is hitting the UK economy - that will also tend to reduce prices, so those together will bring inflation tumbling down.

"It is possible that the downturn will be even more serious and it wouldn't take much to push it below the zero line."

If that happened it would be the first time the UK had experienced deflation since the end of the Great Depression in 1933.

BBC Radio 4's Money Box was broadcast on Saturday,
18 October 2008 at 1204 BST.

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