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UK interest rates to drop to 3.5% by end 2009, says Schroders’ chief economist

Interest rates will drop to 3.5 per cent by the end of 2009 and are likely to fall and stay lower for “a considerable point of time”, says Schroders chief economist Keith Wade.

Speaking today at a Schroders investment adviser forum in London, Wade told delegates to expect further cuts as central banks gain confidence in slashing interest rates.

He said: “We can see interest rates in the UK come down to 3.5 per cent by the end of next year and I dare say they’ll stay there or go lower in 2010. Falling global inflation means that central banks can be more confident about cutting interest rates as there won’t be the issue of whether they lose credibility by doing so- it won’t matter any more.

“Historically interest rates fall very sharply at first or BoE cut rates very quickly, then they wait and see what happens and then normally they have to cut interest rates again. The point is rates generally remain low for a considerable point of time.”

M&G corporate bond fund manager Richard Woolnough says further rate cuts are vital to restore stability in the UK mortgage market: “A half point cut today helps, but from my perspective rates need to be reduced a lot more than this. The lowest UK base rate since 1954 was 3.5 per cent, between July to October 2003. UK rates need to quickly go at least as low as this, and if 3.5 per cent fails to stimulate the mortgage market, it needs to be driven much lower.”

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