Mervyn King says the recession may be longer and deeper than expected! 11.02.09

Author: Steve Olejnik Posted on: 11 February 2009

So, Mervyn King has announced today that we are in a deep recession and that it may be longer and deeper than expected. He has indicated that cuts in rates may no longer be enough to stimulate the economy and that they will need to look at other tools at their disposal.

This in effect means that it is likely that the Bank of England will start to purchase Government bonds and gilts direct from the treasury to increase the supply of money in the economy. Not quite “printing money” but this is the “Quantative Easing” that has been talked about so much recently.

With Mervyn stating that rate cuts are not enough to turn the economy around, there is the question as to whether we will see further Base Rate cuts and whether the current 1% is the lowest rate we will see. My personal opinion is that if the Bank is keen to use all tools at it’s disposal then it might as well carry on bringing rates down below 1%. RBS are now forecasting a further reduction of 0.25% in March and a further 0.25% in April bringing rates to a new low of 0.5% - it is not out of the question that we will see 0% rates this year!

As the Bank grapples with stimulating growth it will hopefully not be too long (mid 2010 is my guess) before we will see rates increase again. The inflation target of 2% will remain and the Bank of England will look to increase Base Rate to keep Inflation under control.

With regard to mortgage rates, the latest Base Rate reduction has had little affect on products but there are deals to be done. For residential mortgages, there are now some great fixed rate mortgages about, an example of which is an attractive 5 year fixed rate of 4.29% with a flat fee of £995. Buy to Let products are still at commercial terms but this is unlikely to change for the foreseeable future and many landlords are now looking at the fixed rates currently available – as an example, at 70% you can lock in for 5 years at 5.54% with a 2.5% lender fee – pretty good in the current climate. As mentioned in previous blogs – I do not envisage Fixed Rates falling further so now would certainly be the time to act.