Will interest rates reach zero percent?

The Bank of England has reduced interest rates to 0.5% in order to put a halt to the housing crash, in the latest reduction we have witnessed over recent months.

With interest rates being cut at such a speed over the past few months it begs the question ‘Will we see interest rates reach zero perecent?

It certainly seems a possibility as the global crisis shows no immediate reaction to the recent interventions that have been actioned. It is worth noting that zero percent interest rates were seen in Japan during the 1990’s.

For those on tracker mortgages it will come as further good news to see their mortgage re-payments cut further and recently discussed in an article ‘Tracker mortgages the way to go‘. It is an interesting situation in that a simplistic view of some past mortgage deals, means some banks appear to be required to pay the borrower for having a mortgage, i.e. those people on introductory tracker rates x% below the base rate. However, this is a hypothetical scenario and very unlkely to happen in practice. We would love to hear your story if this is the case for you.

At present with interest rates so low many brokers seem to be advisng on fixed rate deals. Further reading can be found in ‘Brokers advise on a low fixed rate mortgage deal

Economic teachers must be asked ‘so why don’t the banks just print more money to help the poor?’ when the teacher must often hold back the laughter and just snigger inside. Well, that is actually going to be reality as the financial crisis will enter a new phase.

The Bank of England has announced that it will tackle the economic downturn by pumping hundreds of billions of pounds into the economy. Quantitative easing (aka printing money) is the process of buying up Government and corporate debt.

The bank will create £75bn and use it to buy Government bonds (gilts) and corporate debt over the next three months in an attempt to boost the flow of money within the economy. The bank has been authorised by the chancellor, Alistair Darling to spend a total of £150bn on asset purchases. The £75bn figure includes £50bn previously allocated to the Bank for asset purchases to help restart credit markets.

The hope is that this influx of cash will help kick start the financial sector bringing liquidity to the financial markets and opportunities for companies to borrow once again. This is less than certain to happen and it is not guaranteed that this will actually happen.

At this point; those who are experiencing a reduction in their mortgage payments spare a thought for savers who seem to be becoming forgotten. Their risk seems to widen as their returns diminishes to close on zero. Take a look at this issue in our article ‘Are we forgetting savers as interest rates drop?

However, the diminshing returns savers are experiencing may inadvertently help the property market as those with savings look for an alternative to cash in the bank. One of the options that is increasingly being explored, is purchasing property as a buy to let investment in order to generate an income. Whether this will further increase savers recent misery or be an inspired decision in years to come is of course yet to be seen.


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4 Responses to “Will interest rates reach zero percent?”

  1. I just stopped by your blog and thought I would say hello. I like your site design. Looking forward to reading more down the road.

  2. I found this post just as I was about to post this http://irasciblebroker.blogspot.com/2009/03/savers-and-05-base-rate.html so I ended up quoting you….

  3. Chey Dearing Says:

    The Bank of England has only limited interest in the direction of house prices. I wrote the BOE a letter two years ago to ask that very question, and the response was that house prices are only a secondary indicator for them. Claiming that the reduction of the base rate was to “halt the housing crash” is plainly wrong.

  4. Until lending criteria is relaxed I can not see that house prices will rise too much in the future. The Banks simply do not have the money to lend to high risk customers with only a small deposit.

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