Is a UK base rate cut on the cards?

Despite the fact that Mark Carney, the Governor of the Bank of England, was openly discussing a potential rise in UK base rates just a few months ago, the situation would appear to be changing. David Blanchflower, a former member of the Bank of England’s monetary policy committee, has been waxing lyrical over the weekend about UK base rates. What he is suggesting seems to go against the general consensus at the moment but this is a man who has been there, done it and knows how the system works.

What does the future hold for UK base rates?

The headline news is that David Blanchflower believes UK base rates could fall to 0% and remain at historic lows until 2021. While discussing his views on UK rates he back these up with a current economic scenario he has compared to being “a little bit like 2008”. Even though he seems to be painting a nightmare scenario for the UK economy we should at least listen to what he has to say and the basis for his views.

UK economy

The timing of David Blanchflower’s negative view on UK interest rates could not be better timed with a recent survey showing the UK services sector is struggling, manufacturing has experienced a sharp slowdown and the construction sector is weakening. This triple whammy of depressing economic news would seem to strength David Blanchflower’s views on UK base rates but what does the future really hold?

In light of the triple whammy of disappointing economic news research firm IHS Global immediately trimmed growth forecast for the UK economy in 2016 from 2.1% down to 1.9%. When you bear in mind growth in 2014 was 2.9% and 2.2% in 2015 we have an unfortunate trend starting to emerge.

Further economic stimulation required?

If we do not see a short-term recovery in the UK then we will likely see the introduction of new measures by the Bank of England to breathe life into the economy. While the most basic tool would be a reduction in UK base rates the economy may also require additional direct fiscal stimulus to keep the wheels of commerce moving. So, there is no doubt that experts will be watching UK economic indicators very closely over the coming months with a view to downgrading their forecasts for the short to medium term and reviewing their opinions on UK base rates.

Could we see zero base rates in the UK?

At this moment in time there would not appear to be an immediate threat of zero base rates in the UK but if the UK economy and the worldwide economy continue to weaken then this is a possibility. It would obviously be a shock to investment markets to see this backward step especially when you bear in mind the billions of pounds already pumped into the UK economy since the 2008 crisis. However, yet again a reduction in UK rates would reduce the return on savings accounts and perhaps prompt more people to invest in areas such as property.

How ironic that just months after Mark Carney suggested that UK rates were “on the rise” we are potentially looking towards 0% rates.

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