Rates may drop to 4 per cent

Published: February 12, 2008

Capital Economics is confident that the base rate of interest will fall to a very low level but may take some time to get there.

The firm has revealed that it believes mortgage interest rates will fall slowly but surely over the coming months.

In a statement, Capital Economics said that it expects rates to fall further the longer it takes the Bank of England to announce cuts.

It suggested that as long as the Bank continues to announce reductions of 0.25 percentage points, we can expect the cuts to keep coming for some time.

The statement read: "The markets are increasingly coming round to our view that the slower the MPC cuts interest rates, the further interest rates might eventually have to fall.

"While the markets' expectations for where interest rates will be in June have remained broadly stable over the last month, their expectations for where rates will be in June next year have fallen sharply.

"With inflation worries likely to increase over the coming months, we think that this move has further to go. We still think that interest rates will eventually fall to four per cent, but they are unlikely to get there until sometime next year," it continued.

A 0.25 percentage point cut was announced in February, following the same reduction in December.