Could interest rates be slashed even further?

The prospect of a further cut in interest rates has been mooted by the governor of the Bank of England, who has raised concerns over the chances of deflation.

The Bank’s base rate has been at a historic low of 0.5% for the past six years, having been slashed at the height of the financial crisis. Analysts have been speculating for several years about when they might start to rise, but Mark Carney’s comments show the next move might be in the opposite direction.

Most observers believe a rate cut is unlikely, but the fact that Mr Carney even mentioned the possibility was notable.

The Bank’s monetary policy committee (MPC) is tasked at keeping inflation at 2%. It has been much higher than that for most of the past few years, but recent falls have taken it down to 0.5%, and there are now fears we will soon have deflation – falling prices – and the problems that would bring.

This would be mixed news for savers. Deflation can help them, because it means their savings grow in value in real terms. But any further base rate cut is likely to mean that the banks slash their own rates yet again, heaping more misery on hard-pressed savers who have seen their returns plummet in recent years.

Rain Newton-Smith, director of economics at the CBI, said: “While the risk of deflation is growing, it is unlikely that we will see falling prices for a prolonged period, as the pressure from lower oil prices unwinds ahead.

“Falling oil prices have knock-on benefits to the wider economy for companies and households, [although] the North Sea oil industry is being hit hard.

“With the MPC alert to the risk of low inflation becoming entrenched, a rise in interest rates anytime soon seems off the cards.”

But Nick Dixon, investment director at Aegon UK, went a step further.

“The threat of deflation, together with sterling’s gains against the euro, have created an unexpected challenge for the Bank, and we could see a 0.25% interest rate … before the year is through,” he said.