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Andrea Calo 9th Jan 2009 - 17:00

Will interest rates fall to 0%?

ODDS are now being offered that the UK Bank of England’s base rate will fall to zero per cent in 2009 – with yesterday’s interest rate cut prompting a flurry of bets about where the base rate will be at the end of the year.

And the good news for borrowers – but possible horror for savers – is that the betting suggests that interest rates will FALL further before the end of 2010.

Our spokesman Graham Sharpe, commenting on the historic Bank of England interest rate cut yesterday, said, “All the indications are that in the short-term the rate is more likely to fall than rise and that's the way we expect our punters to bet.”

It’s odds of 2/7 that rates will be LOWER than 1.5 per cent by the end of 2010, 7/2 that they are STILL at 1.5 per cent and an eyewatering 7/1 that they are HIGHER.
And we’re taking bets at odds of 3/1 that the bank rate hits 0 per cent during 2009 – a situation that would have seemed unthinkable during most people’s lifetimes.

Can we really expect interest rates to fall that far?

Why people are betting on 0% interest rates
Zero per cent interest rates seems at face value a ludicrous proposition. The Bank of England would effectively be saying that people could borrow sterling and lend it to other people without any cost to themselves. Whatever interest they charged would be pure profit once their overheads were taken into account.

Why would the bank give away free money? Well, the reason lies in the lack of cash floating about in the global monetary system at the moment. Banks have stopped lending to each other, even with interest rates at historically low levels, and that’s bringing the entire world’s economy to a crunching halt.

The bank has cut rates to their lowest rates ever to persuade the banks to get more money going round the system - which, they hope, would persuade us to start spending again and start the economy going again.

Zero per cent base rates aren’t entirely unprecedented. Most notably Japan lowered its base rates to 0 per cent in the late 1990s to try to beat the effects of a deflationary spiral – despite its economy rivalling the US’s for global supremacy only a few years earlier.

The Japanese economy had slipped into recession, and share and house prices slumped as people refused to spend money on the high street. (Sound familiar?).

Its interest rates stayed at 0 per cent until 2005, except for a brief period during the dotcom crash of 2000-2001.

So there’s some previous form there for a major Western-style economy running on zero per cent interest rates for some time – and, at odds of 3/1, there’s no wonder a few people are betting on it happening here.


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