How Low Can It Go? Interviewer: Toby Thompson Interviewee: Séan Rickard 4th December, 2008 TT Hello, my name is Toby Thompson. I am with Séan Rickard, Senior Lecturer in Business Economics here at Cranfield. We have had today, 4th December 2008, a 1 per cent cut in UK interest rates. Sean, what is your initial reaction to that 1 per cent interest rate cut? SR Well I am very pleased actually. We have now had 2½ per cent cuts in two months and we needed this sort of dramatic action because the economy is slowing down very rapidly. We are being bombarded, almost on a daily basis, with news about house prices falling, car sales declining, unemployment rising and the economy is really slowing down very fast at the moment. And I am glad that at long last, because it took them a long time to get round to this, the Bank of England has realised that a rapid decline in the economy has to be matched by a rapid decline in interest rates and I think therefore they have today demonstrated that they are capable of acting quickly when they need to. TT So can it go any lower? SR Oh, it certainly can go lower. In fact many experts think that in the New Year we will see it down to about 1 per cent, perhaps even lower. In principle, interest rates can go to 0 per cent. I hope we don’t have to go to that level because that does suggest to me a slump rather than a depression – we are more or less saying to people ‘money is free, please take it, please spend it’. But I hope that with the action that has been taken today, which over the next two or three months will begin to work its way through the economy, perhaps when they are looking at the figures in January/February, they will decide they need a further cut, but I really hope that will just about be sufficient then and we will begin to see within about six months the first signs of a recovering economy. TT So you think it will work? SR I hope it is going to work quickly. It’s not a question of will it work. It will certainly work one day, but we don’t want something that is going to hang out for a number of years. I think we should remember that what this is all about is confidence. We have to get consumers to have the confidence to start spending again, we have to get businesses to have the confidence to start investing again and we have to get banks to have the confidence to start lending again. These sorts of cuts in interest rates are really now designed to say to consumers, to say to businesses, to say to banks ‘come on, now is the time to change your behaviour’. And I think it will work. I think that by, probably, March/April next year we will begin to see signs of recovery, we will begin to see the banks lending again, we will begin to see consumer spending. And then I rather suspect what has declined very quickly, will recover very quickly and I rather think by this time next year, we will almost be saying ‘what recession?’ Sure unemployment will still be higher than it is today, house prices will certainly not have recovered to the level they were, but the economy will be growing – I think we will be out of negative growth, we will have positive growth and who knows the Bank of England might even in a years’, time be thinking of putting interest rates back up again. TT Séan Rickard, thank you very much.