UK interest rates set to hit new low

Interest rates are set to hit a record low this week as the Bank of England grapples with a deepening recession.

Interest rates in Britain are set to hit a record low this week as the Bank of England grapples with a deepening recession.

The Bank's official rate has never fallen below the current 2% in its 315-year history, but experts predict a cut of as much as 1% on Thursday as the UK faces up to its worst year since the early 1990s.

Rate-setters on the Bank's Monetary Policy Committee (MPC) will ponder the latest gloomy data including a new low for mortgage lending in November and a record 16.2% fall in house prices during 2008.

And despite Government attempts to kick-start lending, banks and building societies anticipate a further tightening in credit to individuals and firms in the first three months of this year, according to the Bank's latest credit conditions survey.

IHS Global Insight economist Howard Archer said: "We are forecasting a 0.75% cut from 2% to 1.25%, but it is very possible that the MPC could produce a third successive reduction of 1% or more.

"With the recession deepening, credit conditions remaining worryingly tight and inflationary pressures retreating sharply, there is intense pressure on the MPC to bring interest rates down sharply further."

But how much homeowners and borrowers will gain from any rate cut remains to be seen after building society Nationwide said it would invoke a "collar" clause enabling it to stop reducing rates on most of its tracker mortgages.

The collar was supposed to kick in when rates fell below 2.75%, but the group decided to waive the clause last month, passing on December's 1% reduction in full.

But it said on Friday that it would invoke the clause to protect its savers from further aggressive rate cuts - sparking fears that other lenders may follow suit and stop passing on future rate reductions to tracker customers.

Minutes of the MPC's December meeting showed policymakers discussed cutting rates by more than the 1% agreed on but they held back for fear of an "excessive" knock to the pound and confidence in the economy.

This could limit the size of this week's reduction as the pound plunges towards parity with the euro, other economists suggested.

ING's senior economist James Knightley said: "0.5% is likely to be the minimum given that inflation is not a constraint.

"What may prevent a more aggressive move is potential worries about the impact on sterling which has already fallen close to 30% from its peak."

Exporters should gain from a weaker pound but the latest figures from the manufacturing sector showed activity near a record low.

The latest purchasing managers' index from the Chartered Institute of Purchasing & Supply (CIPS) showed a reading of 34.9 in December - close to the lowest level in the survey's 17-year history and an eighth consecutive month of falls for the sector.

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