It now costs more to ensure the UK against default than some of its banks such as HSBC and Lloyds

Bank of England cut its interest rate to 2 percent on Thursday, bringing the UK base rate to its lowest level since 1951. This historically low level reflects the scale of the crisis that has hit the British economy after decades of being the favoured destination for global flows of speculative money.In the run-up to the interest rate cut, the pound fell to US$1.45. This is its lowest level against the dollar for six years. As recently as July the pound was trading at US$2.00. From its peak, the pound has fallen by a total of 30 percent against the dollar.The pound hit its lowest ever level against the euro at €1.1 and a 10-year low against the Japanese yen. It has lost 45 percent of its value against the yen since last summer. The extent of the fall in the pound is comparable to its collapse in 1992, when it was forced out of the European Exchange Rate Mechanism.Market analysts expect the pound to come under further pressure in expectation of more rate cuts over the next weeks. Markets are anticipating that the benchmark UK interest rate will hit zero early next year.

Many economists have argued that the best policy would be to go straight to that level. Professor Willem Buiter, a former member of the Bank of England Monetary Policy Committee, has argued that all the major economies should cut interest rates to zero.“If zero is the floor, there is no reason not to go there immediately,” Buiter wrote in the Financial Times. “The recession in the US, the UK, the Eurozone, Japan and the rest of Europe is, with probability verging on certainty, going to be so deep and so prolonged that the zero lower bound will be reached even by the most anal-retentive gradualist central bank before the middle of 2009. So why not get it over with in December 2008 and possibly do some good in the mean time?”Other commentators see zero percent as an immediate necessity for the UK and regard the latest rate cut, unprecedented though it is, as insufficient. “There’s no point in saving bullets when there’s nothing left to shoot,” said Neil Jones of Mizuho Capital Markets after the Bank of England cut its rate. “The impact on sterling will be negative.”

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