Base rate could plunge to record-breaking 1 per cent

INTEREST rates are heading for just one per cent the lowest since 1694 by the end of next year, a leading City economist forecast today.

Jonathan Loynes, chief European economist at Capital Economics, said the recession would force the Bank of England to carry on cutting its base rate to unprecedented levels.

He added: "Extraordinary circumstances require extraordinary actions. With the current recession likely to be deeper than that in the early Nineties and the credit crunch impairing the effectiveness of monetary policy, we now expect UK interest rates to fall to an all-time low of just one per cent."

The US Federal Reserve is tonight expected to cut its rate from 1.5 per cent to one per cent or even 0.75 per cent. That would put pressure on the Bank of England to lower its base rate from 4.5 per cent to 3.5 per cent when its monetary policy committee meets next week.

Further cuts to below two per cent would take Britain into uncharted territory. The base rate was last at two per cent in November 1951, having been set at that level in October 1939 after the outbreak of the Second World War. It has not been lower than two per cent since the founding of the Bank of England in 1694.

Cuts on that scale would bring huge savings for home owners on tracker mortgages, although many have minimum rates below which they cannot fall. It would almost certainly mean better rates for new borrowers, but these are unlikely to go as low as one per cent. However, it would also pose problems for savers who depend on income.