INTEREST rates of 3% could be necessary to cope with the credit crunch, according to the Liverpool Macroeconomic Research Group.

It rejects the argument that, to do so, the Bank of England and its monetary policy committee would risk losing sight of its mission of controlling inflation.

The report said: “While some modest rise in interest rates was warranted in response to the commodity inflation shock, the credit crunch shock requires a large offsetting cut in the base rate.”

It suggested a base rate of 3% or lower.

“Defenders of the Bank’s reluctance to cut rates have argued there would be a danger to the Bank’s credibility. or that people would be confused about the Bank’s objectives, were it not to have allowed rates to rise as commodity inflation hit the economy.

“However, these arguments are hard to understand, when the Bank law is over a decade old and the Bank’s inflation target has been there since 1992 with clear success.

“Also, the nature of commodity inflation is well understood by ordinary people – they know that, as it is imported, they must ‘tighten their belts’.”