A possible idea?

The Telegraph

There are calls in the UK for the Bank of England to drop interest rates to 0%…will there be calls in New Zealand for the same type of action in a bid to kick start the economy…or is this just madness?

Economists and business leaders have urged the Bank of England to slash interest rates to nearly 0 per cent in a bid to kick-start Britain’s stalled recovery.

The British Chambers of Commerce and the Ernst & Young Item Club, the only forecasters to use the Treasury’s economic model, have both urged the Bank of England to take bold action to boost growth at Wednesday’s meeting of the Monetary Policy Committee [MPC].

The economy has shrunk for three successive quarters according to figures published by the Office for National Statistics last week, which said the UK’s GDP fell by 0.7 per cent between April and June.

Andrew Goodwin, senior economic advisor to Item, said: “We do think there should be a rate cut. The Bank could go down to the rates in the US – 0.0 to 0.25 per cent. It is not the only answer, but it would help.”

Since March 2009 the Bank base rate has remained at 0.5 per cent – the lowest level in the Bank’s 300 year history.

A further rate cut could reduce mortgage repayments for millions of homeowners and would ease borrowing costs for businesses.

But what about savers?

But another rate reduction would dismay savers, who have seen the annual interest payments on their deposits dwindle to as little as 0.1 per cent during the ongoing financial crisis.

Meanwhile, some economists have suggested that such an “absolute zero” interest rate could freeze up money markets.

David Kern, chief economist at the British Chambers of Commerce, said: “A rate cut now could really help businesses. I do not accept the argument that it would cause problems in the money markets.

“I would like to see that more than another round of Quantitative Easing. Higher QE will only have marginal effects on the real economy, and is not risk-free, as it will limit the fall in inflation.

“Lower inflation is critical to underpinning real incomes and sustaining demand in the UK economy.”

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