Bank of England May Cut Rate to Lowest Since 1951

By Jennifer Ryan

Dec. 4 (Bloomberg) -- The Bank of England may cut interest rates to the lowest since 1951 today, bringing them closer to zero and challenging officials to find new tools to head off the threat of deflation.

The Monetary Policy Committee, led by Governor Mervyn King, will lower the bank rate by 1 percentage point to 2 percent, according to the median forecast of 60 economists in a Bloomberg News survey. Sweden’s central bank cut its interest rate by the most since 1992 today.

King’s dilemma mirrors that facing Federal Reserve Chairman Ben S. Bernanke, who said Dec. 1 that he may have to adopt less conventional policies as U.S. borrowing costs approach zero. The Bank of England governor conceded to lawmakers last month that he may have to coordinate policies with Prime Minister Gordon Brown to manage bond markets as U.K. rates fall.

“Rate cuts will help confidence and reduce default risk but they’re not a solution to the global and economic turmoil,” said Lena Komileva, an economist at Tullett Prebon Plc in London. “They’re coming to the realization that they’ll need to do more.”

Other steps may include expanding money supply and using it to finance government deficits or buying securities such as bonds or stocks, former policy maker Willem Buiter said this week. The last central bank to use unorthodox methods on a widespread scale was the Bank of Japan earlier this decade.

Bernanke’s Plans

The Bank of England isn’t alone in its predicament. Bernanke said Dec. 1 that he has “obviously limited” room to cut interest rates further after cutting the U.S. benchmark to 1 percent, and may use less conventional policies such as buying Treasury securities.

The European Central Bank, which has yet to elaborate on how it would expand its monetary toolkit, will cut its interest rate by a half point to 2.75 percent at 1:45 p.m. in Brussels today, according to the median estimate of 56 economists in a Bloomberg News survey.

Sweden’s Riksbank lowered its key rate by 1.75 percentage points to 2 percent today. New Zealand’s central bank cut its rate by a record 1.5 percentage points to 5 percent, and Bank Indonesia lowered its rate to 9.25 percent from 9.5 percent.

The pound fell to near an all-time low against the euro and traded close to its weakest since 2002 versus the dollar before the Bank of England decision. The currency was at $1.4587 and 86.43 pence per euro as of 8:37 a.m. today in London.

Zero Rate

The U.K. interest rate will reach zero early next year, Buiter told Bloomberg Television this week. Buiter, who correctly predicted last month’s 1.5 percentage-points cut, said the bank will repeat it today and again in January. The rate has never been lower than 2 percent since the Bank of England was founded in 1694.

Chancellor of the Exchequer Alistair Darling has also taken action to bolster the economy, unveiling the biggest fiscal stimulus in two decades on Nov. 24 and pledging to do “whatever is necessary” to get banks lending again.

King said Nov. 25 that “close coordination” with the government is needed if the interest rate reaches zero and said the biggest challenge facing policy makers is getting credit flowing through the economy again. Banks approved just 32,000 mortgages in October, matching the least since 1999.

Credit Problem

“It’s not just about the price of credit but the availability of it,” said Stewart Robertson, an economist at Aviva Investors Ltd. in London, which manages about $230 billion in assets. “The message from central banks is that they recognize the severity of the situation and they will do something about it.”

The U.K. economy may contract by 1.1 percent next year, the most since 1991, the Organization for Economic Cooperation and Development said Nov. 25. Gross domestic product fell by 0.5 percent in the third quarter, the first drop in 16 years.

Policy makers face a growing risk of missing their 2 percent inflation target as economic growth slows. King refused to rule out the risk of deflation when he presented forecasts in November, which showed a danger that consumer prices may start to fall across the U.K. economy. An index showing prices charged by services companies fell to the lowest since 2001 last month.

“All the policy instruments that are available, fiscal stimulus, cuts in rates that have been tried and don’t work,” Vince Cable, the Liberal Democrat lawmaker who speaks on finance matters, said in a Dec. 2 speech in London. What will follow “is called quantitative easing, which in the language of the man in the street is printing money. That’s being discussed in the U.S. and will be tried here,” he said.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net