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What happens if interest rates fall to 0%?

We have the potentially intriguing situation which could see UK base rates fall to 0% in the short to medium term as the government tries ever harder to refloat the UK economy. But if rates do fall to 0% where does this leave the financial sector? Savers? Mortgage holders?

A fall to 0% is something which has never been seen in the modern era and something which would be a drastic measure in itself. However, there is a chance this could happen as more and more interest-rate reductions have less and less of an impact on the UK economy as a whole. A reduction to 0% would severely reduce finance costs for the banking sector with the potential that this would release massive liquidity injections for consumers to use to tackle their financial difficulties.

A fall to this level would also see businesses able to borrow money at a rock bottom prices in order to replenish and rejuvenate their operations and balance sheets which should in due course induce more confidence into the employment market which would then filter through to the consumer. The ultimate aim is to increase consumer spending which will then see business levels expand and hopefully pull the economy out of the current slowdown.

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