Could interest rates go even lower?

A reduction in the base rate from 0.5 per cent to 0.25 per cent is no longer unthinkable.

With just a month to go until his autumn statement, the latest set of growth forecasts make grim reading for George Osborne. Ernst and Young's Item club predicts that the economy will grow by just 0.9 per cent this year, well below the 1.4 per cent it predicted three months ago. It has also downgraded its 2012 growth forecast from 2.2 per cent to 1.5 per cent.

Peter Spencer, the body's chief economic adviser explains:

It's worse than we thought. The bright spots in our forecast three months ago - business investment and exports - have dimmed to a flicker as uncertainty around Greece and the stability of the eurozone increases.

Significantly, the club uses the same forecasting methods as the Office for Budget Responsibility (OBR), offering us a preview of the downward revisions the OBR will have to make when it publishes its new estimates on 29 November, the day of Osborne's statement. Lower growth, of course, means higher borrowing, so the OBR is also likely to revise its deficit forecasts upwards. The club predicts that unemployment will rise from 2.57m to 2.7m over the next 18 months, resulting in lower tax revenues and higher welfare payments.

In response, it calls for a cut in stamp duty for first-time buyers and a reduction in interest rates from their current record low of 0.5 per cent to 0.25 per cent. The Monetary Policy Committee (MPC) has held the base rate at 0.5 per cent since March 2009 but it's worth noting that the possibility of reducing it even further was discussed at the last Bank of England meeting. The most recent BoE minutes (from 7-8 September) noted that the MPC "revisited the earlier decision not to lower Bank Rate below 0.5 per cent".

A reduction to 0.25 per cent still seems unlikely but, given the parlous state of the British economy, I'd expect that the MPC is ruling nothing out. As Mervyn King said when he announced another round of quantitative easing, "When the world changes, we change our policy response".

George Eaton is political editor of the New Statesman.

Photo: Getty
Show Hide image

Theresa May is paying the price for mismanaging Boris Johnson

The Foreign Secretary's bruised ego may end up destroying Theresa May. 

And to think that Theresa May scheduled her big speech for this Friday to make sure that Conservative party conference wouldn’t be dominated by the matter of Brexit. Now, thanks to Boris Johnson, it won’t just be her conference, but Labour’s, which is overshadowed by Brexit in general and Tory in-fighting in particular. (One imagines that the Labour leadership will find a way to cope somehow.)

May is paying the price for mismanaging Johnson during her period of political hegemony after she became leader. After he was betrayed by Michael Gove and lacking any particular faction in the parliamentary party, she brought him back from the brink of political death by making him Foreign Secretary, but also used her strength and his weakness to shrink his empire.

The Foreign Office had its responsibility for negotiating Brexit hived off to the newly-created Department for Exiting the European Union (Dexeu) and for navigating post-Brexit trade deals to the Department of International Trade. Johnson was given control of one of the great offices of state, but with no responsibility at all for the greatest foreign policy challenge since the Second World War.

Adding to his discomfort, the new Foreign Secretary was regularly the subject of jokes from the Prime Minister and cabinet colleagues. May likened him to a dog that had to be put down. Philip Hammond quipped about him during his joke-fuelled 2017 Budget. All of which gave Johnson’s allies the impression that Johnson-hunting was a licensed sport as far as Downing Street was concerned. He was then shut out of the election campaign and has continued to be a marginalised figure even as the disappointing election result forced May to involve the wider cabinet in policymaking.

His sense of exclusion from the discussions around May’s Florence speech only added to his sense of isolation. May forgot that if you aren’t going to kill, don’t wound: now, thanks to her lost majority, she can’t afford to put any of the Brexiteers out in the cold, and Johnson is once again where he wants to be: centre-stage. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.