INTEREST rates may be slashed to zero after Mervyn King, the Governor of the Bank of England, warned that the economy could contract by 2 per cent next year.
Mr King vowed to cut the official cost of borrowing to "whatever level is necessary" to boost confidence and stave off a long and deep recession.
The government will outline its plans for the economy and spending in the Pre-Budget Report, which it
confirmed yesterday would be unveiled on 24 November.
Mr King revealed that the economy is already in recession in his latest inflation report. Confidence had been "shaken badly" by the banking crisis and inflation was expected to drop to 1 per cent next year.
Unemployment could hit almost two million by Christmas and reach three million by 2010.
In raising the possibility of further dramatic cuts, Mr King also confirmed that the Bank's previous concern with keeping inflation in check has been cast aside. Instead, his monetary policy committee will focus on keeping the UK from sliding into a Japanese-style deflationary spiral.
Slashing rates will kick-start inflation, but the Bank knows that with commodity and food prices set to drop, sky-high prices will no longer be a realistic concern.
Vince Cable, the Liberal Democrat's Treasury spokesman, said that even if rates were cut to zero, there was no guarantee that the cheap credit would be passed on to desperate consumers and businesses.
"The Governor of the Bank of England is right to say that interest rates will fall a lot further. We may find ourselves in a world of zero interest rates before too long. The actions we have urged, including drastic interest rate and tax cuts, now attract wide political support.
"Ministers must consider more drastic action to ensure that credit flows on reasonable terms to solvent borrowers."
