Britain may need 0% interest rate to avoid a depression, leading economist warns
Interest rates may have to be slashed to zero as Britain battles to avoid a full-blown depression, one of the country's leading economists warns today.
The extraordinary claim from Charles Goodhart, a founding member of the Bank of England's Monetary Policy Committee, came as Gordon Brown signalled that he wants to see further, aggressive cuts in the cost of borrowing.
Mr Goodhart, professor emeritus of banking and finance at the London School of Economics and a member of the MPC between 1997 and 2000, tells Channel 4's Dispatches programme: 'Interest rates will go down from now, by how far and how fast nobody knows.
Slashed: The Bank of England may need to cut interest rates to 0 per cent, economists have warned
'They could go to zero. They went to zero in Japan in the 1990s when the Japanese had a recession or depression which went on for a long time and was quite severe.'
Such a drastic move here would bring rates, currently 4.5 per cent, to their lowest level since the Bank of England was founded in 1694.
Despite the Bank's independence in setting rates, Mr Brown said yesterday: 'Inflation is coming down over the next few months and that will mean that it gives scope to the monetary authorities, including the Bank of England, round the world, to make a decision about interest rates.'
However, many experts warn that a rush to cut rates is 'too little, too late' because Britain is already in what is predicted to be a long recession.
Mr Brown will today insist he is right to try to borrow his way out of the downturn despite growing warnings from economists that he could bankrupt the country.
The Prime Minister will say he will allow public borrowing to spiral still further - hinting that he may even seek to use the money for tax cuts for workers, businesses and homeowners.
The Government also intends to bring forward spending on major state-funded housing, defence and energy projects to try to kickstart the economy.
But the proposal - based on the interventionist philosophies of John Maynard Keynes in the last century - is too risky with such a high level of national debt, according to experts.
Sixteen signatories of an open letter, who include Trevor Williams, chief economist at Lloyds TSB Corporate Markets and Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club, wrote: 'We would like to dissent from the attempt to use a public works programme to spend the country's way out of recession.
'Public expenditure has already risen very rapidly in recent years, and a further large rise would take the role of the state in many parts of the economy to such a dominant position that it would stunt the private sector's recovery once recession is past.
'Occasional slowdowns are natural and necessary features of a market economy.
'It is inevitable that government expenditure and debt naturally rise in a recession but planned rises in government spending are misguided and discredited as a tool of economic management.'
But Mr Brown, speaking to business leaders and academics in central London, will today insist they are wrong.
'We will and can allow borrowing to rise to help restore demand and to come to the aid of workers, businesses and homeowners,' he will say.
'The responsible course is to borrow now to maintain growth and output, and to reduce borrowing as a proportion of GDP as the economy recovers and tax receipts rise again.'
The Conservatives said yesterday Britain was entering recession with a higher proportion-of national debt than Nicaragua or Uganda.
Shadow Foreign Secretary William Hague told the BBC's Andrew Marr Show: 'We are going into the recession in one of the worst-prepared states of any of the developed countries, certainly of the G7 countries.'
Mr Brown will today repeat his calls for reform of the international financial system. He told BBC Scotland's Politics Show yesterday his only regret over his decade as Chancellor was that other countries failed to heed his advice, which he claimed could have averted the world economic crisis.
The Prime Minister said he was 'angry' that banks were not supervised across international borders to act as an 'early warning system', ten years since he first argued for it.
'I have been pressing for this for years,' he said. 'I actually think we'll now get the changes that are necessary. But while we wanted to go ahead with these changes, other countries did not.'