Interest rates 'to fall further'

The Bank of England has signalled that homeowners and borrowers could see interest rates at record lows next year as policymakers battle to lift the UK out of recession.

Before the Bank's 1.5% cut last week, markets had assumed that rates would fall to around 2.75% by the end of next year.

But many experts are now predicting that they will fall below the all-time low of 2%, in line with the Bank's forecast that the economy might contract by around 2% by early next year.

Inflation, currently at 5.2%, is set to plummet as the economy slows, commodity prices fall and the looming recession becomes the main threat.

Bank governor Mervyn King said the downward revision to the inflation outlook is the largest in the 11-year history of the rate-setting Monetary Policy Committee.

He said that there are "very few historical parallels" to the current situation, adding: "Confidence has been shaken badly. All this will restrain demand looking into next year."

In the run-up to Chancellor Alistair Darling's pre-budget statement, Mr King said that any stimulus package would be "perfectly reasonable" as long as it was a temporary measure and there were plans to rebalance the public finances in the medium term.

Copyright © Press Association 2008

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