King hints rates could be cut to ZERO as Bank readies new stimulus measures

By HUGO DUNCAN AND BECKY BARROW and THIS IS MONEY

Bank of England Governor Sir Mervyn King yesterday told MPs he did not rule out further cuts to interest rates as he outlined new plans make banks lend.
Addressing MPs on the Treasury Select Committee, Sir Mervyn raised the possibility that the base rate, which was slashed to a historic low of 0.5 per cent in March 2009, could be cut even lower.
Such a move would delight millions of homeowners, who would see  their loan repayments fall, but horrify savers whose nest eggs have already shrunk.
Enlarge Sir Mervyn King: Pulling out all the stops

Sir Mervyn King: Pulling out all the stops
Sir Mervyn said he ‘did not rule out’ the possibility of cutting the base rate to 0.25 per cent or even zero.
While it was not his preferred choice of fire-fighting tactic, he added: ‘We have nothing in principle against cutting bank rate further.’
Sir Mervyn expressed sympathy for savers, who are being paid interest rates close to zero and have put up with dire levels for more than three years.
 
He said: ‘I can understand why so many savers are concerned about the level of interest rates.’
In a gloomy assessment of the economic picture, Sir Mervyn warned that Britain still faced years of economic hardship.
A ‘pessimistic’ Sir Mervyn King said: ‘When this crisis began in 2007/8, most people, including ourselves, did not believe we would still be right in the thick of it five years later.’
He added: ‘I don’t think we are yet halfway through.’
The Bank is under pressure to come up with measures to stimulate the economy, which fell back into recession in the first quarter of the year and will struggle to register growth in the second quarter.
The Bank’s Professor David Miles, who also gave evidence to MPs, said the outcome of fire-fighting tactics such as cutting rates and pumping £325billion into the economy through Quantitative easing had been ‘extremely disappointing’.
But the current situation would be much worse if the Bank had not resorted to the emergency tactics. He said: ‘Without them, what has been a dreadful few years could have been a truly catastrophic few years.’
The Bank is widely expected to use its financial stability report on Friday to allow UK banks to free up billions of pounds from their cash buffers to help drag the economy out of recession.
MPs grilled the Governor on plans for a new scheme to make banks lend, following the failure of Project Merlin – which imposed lending targets on banks but led to an overall fall in lending.
Sir Mervyn King promised that the incentives offered in the ‘funding for lending’ scheme would be so attractive it would ‘hit banks in  the face’.
But asked by MPs on the Treasury Select Committee if lending would increase, he said: ‘I can give no guarantee. That will depend on what happens in the world economy and the impact of that in the UK.’
His comments cast doubt over whether net lending will increase by 5 per cent or £80bn a year as planned.
Labour MP George Mudie said: ‘With Merlin we were sold a pup and with this we want expanded lending. Anything short is going to let a lot of people and businesses down very badly.’
The scheme – which is due to be up and running within weeks – will see banks get money at ultra-low rates on the condition they pass it on to businesses and households.
It also looks set to unleash another round of quantitative easing next week on top of the £325bn freshly-printed cash it has already pumped into the economy.
Nawaz Ali, an analyst at currency experts Western Union, said: ‘The Bank is ready to pull out all monetary stops to defend Britain from Europe’s unrelenting nightmare.’
It came as Government figures showed a previous scheme to boost lending – the £20bn National Loan Guarantee Scheme or ‘credit easing’ – had a slow start.
Since its launch in March, around £1.68bn was handed out to 10,000 small firms.

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