Interest rates are set to hit new record low

British Interest rates are set to hit a record low by the end of the week as the Bank of England struggles with a deepening recession.

The Bank’s official rate has never dropped below the current 2 per cent in its 315 year history, but financial experts predict a cut of as much as 1 per cent by Thursday as the Britain faces up to its worst economic year since the early 1990s.

The Bank’s Monetary Policy Committee (MPC) will ponder the latest gloomy data including a new low for mortgage lending in November and a record 16.1% fall in house prices in 2008.

And despite Government attempts to kick-start lending, banks and building societies anticipate even more tightening in credit to individuals and firms in the first quarter of this year, according to the Bank’s latest credit conditions survey.

IHS Global Insight economist Howard Archer stated: “We are forecasting a 0.75% cut from 2% to 1.25%, but it is very possible that the MPC could create a third successive reduction of 1% or more.

“With the recession deepening, credit conditions remaining worryingly tight and inflationary pressures retreating sharply, there is intense pressure on the MPC to bring interest rates down even further.”

But how much homeowners and indeed borrowers will gain from any rate cut remains to be seen after the Nationwide building society said it would invoke a “collar” clause enabling it to prevent reducing rates on most of its tracker mortgages.

The collar was supposed to kick in when rates fell below 2.75%, but the building society decided to waive the clause last month, passing on December’s 1% reduction in full.

But it said last week that it would invoke the clause to protect its savers from further rate cuts sparking fears that other lenders may follow suit and stop passing on future rate reductions to tracker customers.

The minutes of the MPC’s December meeting showed policymakers discussed cutting rates by more than the 1 per cent agreed on but they held back for fear of an “over excessive” knock to the pound and confidence in a already strained economy.