Rates on their way to an unprecedented low of 1%

Roger Bootle, economic adviser to Deloitte, comments on November MPC meeting

• • The 1.5% cut in interest rates, from 4.5% to 3%, is an extremely bold move and shows that the MPC appreciates the seriousness of the situation. But more needs to be done. I think that interest rates need to be cut to the unprecedented level of 1%, and quickly.
• The upshot is that the UK is set to endure a recession that will be deeper and longer than the one seen in the early 1990s. I expect that GDP will fall by around 1.5% next year and a further 1% or so in 2010. With deflation also threatening, the MPC needs to keep cutting interest rates aggressively. I think that they will need to fall to 1%.

• Rates have never before been this low, but extraordinary times require extraordinary action. And it is not impossible to imagine circumstances under which rates end up having to go lower, perhaps even to zero as they have done in Japan.li>
  

Roger Bootle, economic adviser to Deloitte, comments on November MPC meeting

• Some may suggest that today's cut smacks of panic. After all, in the 11 years since it was formed, the MPC has never before cut rates by more than 0.5%, no matter a reduction of 1.5%. But never before has the MPC faced the dangers that it does today. It is all very well moving interest rates by a quarter point here and there when the economy is expanding at a rate only just above or just below its trend rate. But as highlighted in the MPC's statement released alongside today's decision, the latest indicators suggest that the economy has pretty much fallen off a cliff.

• GDP fell by a whopping 0.5% in Q3 of this year, taking the level of output broadly back to where it was a year earlier. And the fall in the business activity index of the CIPS/Markit report on services in October suggests that more of the same should be expected in Q4. By Christmas, the UK economy will be deep in recession, with output already having fallen by 1%.

• What's more, much worse is to come. After falling by 15% over the last year, house prices are not even half way through an adjustment that I think will see them fall by a total of 35%. And unemployment is about to soar. I think that it will rise by around 1.7 million, resulting in one in ten workers being without a job.

• On top of that, the full effects of the credit crisis have yet to be felt. While the government's recapitalisation of the banks appears to have prevented a full-scale financial meltdown, it will not prevent a sharp slowdown in lending, if not an outright contraction. Even if lenders are willing to lend, in the current climate there is no guarantee that borrowers will be willing to borrow.

• Finally, the UK will flirt with deflation next year. The plange in the oil price and the recession means that there is a real chance that CPI inflation will fall below zero. In a worst case scenario, the economy could get bogged down in debt-deflation

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