Image: Jeff Moor - EMPICS
Bank of England documents have revealed that policymakers have discussed the idea of a further cut in interest rates - despite the fact that the base rate is already at a record low of 0.5%.
Minutes from the Monetary Policy Committee's (MPC) September 2011 meeting showed that the Bank's panel of economists raised the idea as a way of boosting the ailing economy.
While members chose to continue on their current course, including a freeze on the amount of money invested in the controversial quantitative easing (QE) scheme, it's possible that the idea could be revisited should the UK economy continue to falter.
Q&A: what is quantitative easing?
Why a rate cut might be necessary
The revelation from the Bank comes just a day after the International Monetary Fund (IMF) cut estimates for UK growth from the 1.5% forecast in June to just 1.1% - now well below the 1.7% predicted by the Office for Budget Responsibility (OBR).
That sparked fears of a fall back into recession, and with the government opting for a strong programme of spending cuts, the options available to stimulate growth appear limited.
There has been speculation that the Bank could attempt to provide some stimulus through an extension of its £200 billion QE programme - a measure called for by MPC member Adam Posen. However, given the concerns over the inflationary impact of money printing, could a further, small cut in interest rates be one further surprising trick up governor Mervyn King's sleeve?
What would lower interest rates mean?
Speaking to MSN Money, Bart Lambrecht, professor of finance at Lancaster University Management School, said it remains unclear whether a further cut of 0.25% would make a real improvement to the borrowing conditions for firms and households.
Professor Lambrecht said: "In order to stimulate investment it is more likely that the Bank may inject more cash into the economy through a further round of quantitative easing. More QE (or a reduction in interest rates) is likely to push the inflation rate higher, but this may be considered a lesser evil than slowing growth and rising unemployment."
Phillip Bray, marketing manager at Investment Sense, also doubts that the Bank will opt for further rate cuts, given that the impact on household budgets is likely to be negligent.
"Mortgage rates are historically very, very low, so the feel-good factor for cutting rates would be minimal," he said.
"But it's really starting to bite savers. If you cut rates again and inflation continues to rise and not fall away next year, you've just made things harder for savers, who are already struggling. A rate cut now could be detrimental to a whole number of people."
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Negative interest rates?
Were interest rates to fall close to zero, could we face the prospect of negative returns on our cash?
If rates were to fall, so would the returns available to Britain's banks, meaning that cost would have to be recouped elsewhere. One way this could be done is by undercutting the base rate, which could effectively lead to negative rates.
That would mean charging customers to keep their savings with banks - a move that would probably cause a revolt given the widespread anger that's already felt over savers' lack of options.
Simon Rose of campaign group Save our Savers told MSN Money: "There's no reason we couldn't go into an era of negative interest rates - all I can say is that I sincerely hope not. Savers are having a difficult enough time as it is with the base rate at virtually zero and inflation at [more than] 5% on the RPI level and climbing.
"The idea of negative interest rates would almost be comic if it wasn't so appallingly serious," he added.
Customers likely to lose out
Lambrecht, though, believes that the idea of banks charging customers to deposit savings seemed "implausible", but adds that institutions could instead "increase the charges and fees associated with certain accounts".
"For example, if a bank offers a 0.2% interest on an account but charges money or fees for maintaining the account, withdrawing money, sending statements et cetera, then this could translate into a nominal interest rate that is, in effect, negative," he said.
For now, then, it would appear savers' money is at least safe from the prospect of negative returns, even if the majority will find it difficult to stop their cash being eroded in real terms due to high inflation.
In the longer term, it's really a case of 'who knows?'. While a further cut in interest rates is deemed a less likely path for the Bank to follow, few in March 2009 would have anticipated that the base rate would remain at its record low for a further 30 months and counting.
If the economy does fall back into sharp recession, the Bank may well be forced to use every trick it possibly can to boost growth. It's not just savers that will be hoping that doesn't turn out to be the case.
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