Even though Britain has been out of recession for more than five years and is the strongest growing economy in the G7, Andy Haldane, the Bank of England's chief economist, said yesterday that he believes that the next move in UK interest may be down rather than up.
Speaking in a non-official capacity at a business lunch in Rutland yesterday, Haldane said that he could see good reasons for interest rates to move in either direction.
Interest rates have been held at 0.5 per cent since March 2009 with most analysts predicting that they would begin to rise again some time in 2015 or early 2016, so the suggestion that they may be reduced again is "a pretty extraordinary prospect", The Guardian says.
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Haldane said that if rates were to be set by a computer algorithm, rather than the Bank of England's Monetary Policy Committee (MPC) then "the optimal path for interest rates would involve them being cut in the short-run towards zero for around a year".
The BBC's economics editor Robert Peston described Haldane's comments as "big stuff".
The pound fell sharply in response to the comments falling as low as $1.4738 in afternoon trading – 1.5 per cent lower than at the start of the day.
So why does Haldane think that cutting interest rates is as likely a scenario as raising them? The reason is simple, says the Guardian. The UK has experienced two years of solid growth and falling unemployment, yet despite this, inflation has fallen. Financial markets have long been anticipating a rates increase, but forecasts have been consistently pushed back and gradually predictions of the eventual peak in rates have been lowered.
Some members of the MPC believe that the falling oil price has contributed to low inflation, as well as falling agricultural commodity prices and low wage growth.
The government's inflation target for the next two years is set at 2 per cent, but Haldane said: "The risks to inflation at that horizon are plainly two-sided. But my personal view is that these risks are skewed to the downside."
So when will interest rates rise again? "Not now, that’s for sure," said the Daily Telegraph's Jeremy Warner. "Maybe never. OK, so never say never, but very probably not for a long time."
