Base rate drops to 0.5%

5 March 2009

At noon today, the Bank of England`s Monetary Policy Committee (MPC) announced it was lowering the base rate (also known as bank rate) to 0.5% - a further drop of 0.5% from what was an historic low of 1%.

The move will affect different people in different ways. Some people with debts (particularly mortgage debts) will be delighted to see their monthly payments drop - but many savers will be worried to see the returns on their savings fall even further along with the base rate.

Whatever the reaction, the move did not come as a surprise: a Reuters poll of 63 economists, for example, revealed that 54 predicted the decision.

The real question seems to be `What happens now?`. Now that the base rate can`t fall by any more than half a percent, the Bank of England will need to turn to different measures to invigorate the economy.

In particular, economists expect to see the introduction of `quantitative easing` (QE)- basically increasing the amount of money in the system.

`The thinking behind QE,` states the Financial Times, `is that banks will become tired of hoarding cash earning zero rate of return. That should prompt them to lend to homes and businesses, sparking a chain reaction of demand.`

However, no-one is sure how much money needs to be created. Bronwyn Curtis of HSBC, according to The Times, said "Too much and inflation will take off, too little and it won’t be effective in restoring growth."

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