Bank Of England’s Deflation Defense: More Rate Cuts

Bank of England governor Mervyn King said today (Wednesday) that dangerous deflation is opening a door for further interest cut rates.

“In the space of a few months, we have gone from the highest rate of manufacturing input price inflation in nearly 30 years to the lowest monthly rate on record. And measures of short-run inflation expectations have fallen back sharply,” King read from a statement before a press conference.

When asked about cutting rates, King said the Bank of England is “prepared to cut bank rates to whatever level is necessary” to keep inflation at its 2% target, Bloomberg reported.

Already, the BOE and government have made several moves to restore order to the U.K.  economy.

Last week, the central bank cut its benchmark rate 1.5 percentage points to 3.0%, marking the lowest BOE interest rates in 53 years and the biggest single cut in 27 years.

In early October, the government announced an $87 billion (50 billion pound) recapitalization plan to repair bank balance sheets and restore confidence.

Also with that plan, the Bank of England increased the amount of funds available for short-term lending to $346 billion (200 billion pounds). The plan further guarantees an additional $432 billion (250 billion pounds) in loans.

That same week, the BOE was also one of the nine central banks around the world that simultaneously cut interest rates to put an end to the worst market rout since the Depression era.

“There are very few historical parallels to the present set of circumstances,” said King. “So the uncertainty surrounding the projections in today’s Report is unusually large.”

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