Afternoon:
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Bank cuts interest rate to record low
Jonathan Prynn and Hugo Duncan05.03.09
- Commentary: We're running out of options, but this one just might break the credit-markets logjam
- Anthony Hilton: Don't bank on world's leaders to rescue us
- Tumbling rates may bring end to free banking
- House prices and new car sales both slump
- Commentary Will 0.5% off make any difference? Will it heck
Free banking was thrown into doubt today as interest rates were halved to an all-time low of 0.5 per cent.
The latest cut, the sixth since October, immediately triggered warnings that free accounts were doomed because of the squeeze on bank profit margins.
One bank chief told the Standard that as interest rates approach zero: “We will have to start charging again.”
The warning came on another historic day for the economy when:
● The Bank of England said it was having to cut the cost of borrowing yet again because of “depressed confidence and persistent problems in international credit markets”. About three million homeowners on tracker mortgages will see an immediate saving.
● It also admitted that rate cuts alone were not doing enough to revive the economy and authorised a £75 billion injection of cash into the banking system through so called quantitative easing. The radical move to “print money” aims to stop the recession turning into a deflation-fuelled depression.
● Economists at PricewaterhouseCoopers predicted gross domestic product will fall five per cent this year — far worse than Treasury forecasts — and drop a further two per cent next year.
● Halifax said house prices fell 2.3 per cent last month, bringing the year-on-year slump to 17.7 per cent.
The Bank cut interest rates from one per cent to a new 315-year low. Rates were at five per cent in October when the monthly reductions began.
After today's cut financial experts said the banking industry was rapidly preparing for the death of the British tradition of no-fee banking for accounts in credit.
Kevin Mountford, head of current accounts at financial website Moneysupermarket.com, said: “Banks have to recoup their margin from somewhere. If ever they are going to move to a fee-based system, now is the time with so much going on.”
Andrew Hagger of rival website Moneynet.co.uk, said: “It is coming. Some of the banks are already starting to position themselves for the end of free banking. It may not be as blatant as a £5-a-month charge, it will be something more creative.” Britain is the only major world economy where most bank customers who stay in credit are not charged.
However, an estimated 10 million customers have already been moved over to so called “packaged accounts” which charge a monthly fee in return for added features such as travel insurance.
Another major threat to free banking is an OFT investigation into bank charges that could put a cap on the fees for unauthorised overdrafts.
The Bank of England's move to pump £75 billion of newly-created money into the economy over the next three months is a landmark decision.
Quantitative easing is a policy so far untried in the UK. With the recession showing no signs of easing, the Bank has warned of a dangerous period of deflation as prices tumble.
With its arsenal against deflation almost exhausted it today turned to “unconventional” measures to boost spending and drive a recovery.
Chancellor Alistair Darling gave the Bank permission to create up to £150 billion of new money to pump into the economy and Bank governor Mervyn King today said the first £75 billion will be created in the next three months.
The Bank will not literally start printing new £10, £20 and £50 notes but instead buy assets such as gilts and corporate debt off banks by electronically transferring money into their accounts.
It is hoped the banks will use the extra money to increase lending to businesses and consumers who will then spend it and help drive an economic recovery.
In a letter to Mr King, the Chancellor said it was “appropriate to consider additional instruments” to stave off recession, prevent deflation and return inflation to its target of two per cent.
One leading banker welcomed the move saying: “The world needs a short burst of stimulus and this is the right way to achieve it.”
However, there are fears the increased supply of money could send inflation spiralling. Shadow chancellor George Osborne said the Bank's move was “a leap in the dark”. He said: “Given that the Government's other measures have completely failed and the recession continues to get worse, this was a last resort. I don't think anyone should be pleased that we have reached this point. It is an admission of failure and carries considerable risk.
“Let us hope that this approach taken by the Bank of England does lead to an easing of credit conditions. This is a leap in the dark.”
Stephen Gifford, chief economist at accountant Grant Thornton, said: “It is a high risk strategy riddled with economic, political and practical problems. Few policy makers have any experience of implementing it and how much easing is appropriate is largely guess work.”
Ian McCafferty, CBI chief economist, said: “With interest rates already at historic lows, the conventional rate cutting tool is becoming less and less effective as a means of stimulating the economy.
“Though this latest cut will help support business and consumer confidence, it is unlikely to have a dramatic impact on the cost or availability of credit.
“A swift move towards quantitative easing as a way of boosting money supply and lending directly is now the MPC's best bet for supporting the economy and getting credit flowing again.”
Reader views (22)
I don't know much about the mechanics of producing money but I do know you don't 'pretend' to have money you haven't got - this story brought back childhood memories of the hours I spent labouring over trying to make realistic looking pound notes with cryons and crumpled paper when I was a child!
As a SAVER - shock horror I didn't get a sub prime mortgage worth 10 x my dubious salary - or rack up massive debts on credit cards - I am now being penalised for thinking realistically. I know of ex-pats who depend on their interest to live on in cheaper countries - are they going to be bailed out with toy money? Or will they be forced to erode into their lump sum, leaving them in a precarious financial position?
- Real, London
I am not benefitting at all from the low interest rates. My mortgage is fixed for the next five years and my credit card interest is still sky high. I have also only had a minimal 2% pay rise whch was taken up by the increase in gas and electricity increases.
The low interest rates are a waste of time because very few people are actually benefitting at all and the banks are not passing them on to customers.
I also pay twice for my prescriptions - at the chemist and with my high NI contributions. I seem to be hit all ways for the worst just like all workers in this country.
- Jan, London
These elite band of Bankers, Fat Cats and Politicians are risking everything to try and hold on to the cushy life that they have forged for themselves. Maybe it would be better if everything did go down, then it would put us all back to a level playingfield.
- Mark Burton, St Ives Cambs
I know a retired couple whose only income beyond the state pension is savings income. Their monthly income is now minimal and they ahve to use capital to pay the larger bills. These super low interest rates only seem to apply to savers. My mortgage is 3.995 and my credit card around 17.5%. Sheer madness!
- Michael, London
Er, quantative easing, the purchase of assets, claimed to be gilts and corporate debt. Is this the same corporate debt that is being held by the banks and going bad. Is it corporate debt supported by real estate, whose value is crashing through the floor. What the hell are we doing. It would appear that interest rates are so low so that all those financial institutions burdened with debt can have an easy time of it and still collect their bonus's. As for the SME and private individuals who create the real wealth, where can the get access to funding at super low rates? They can't! If Gord Helpus and Merv want us to start spending again, give us access to funds at reduced rates. When you think your job is not secure, you tend to hang on to your money, unless the risk of borrowing is reduced. I could borrow money cheaper a year ago when bank rates were cosiderably higher than I can today. Borrowing for a car or say a new kitchen has a price,but todays' price is far too high. Back to greedy bankers who want to maintain their margins and pay levels.
- Alan, carlisle uk
For all our sakes I hope this works, but I have a horrible feeling we will be disappointed. Printing extra money may suit the international investment community as they play monopoly with our cash, but there is a price to be paid in future inflation which could well not just rise but rocket. It seems to me the Government would have been much better off, as would we all, if they had isolated initially the toxic debts at the heart of all this through a national guarantee scheme: but party political considerations appear to have stopped Gordon Brown from taking up the option. He appears more and more like a financial Canute trying to wish away the rising tide of debt and pent up inflationary pressures. Heaven help us when the dam bursts.
- James Elliott, Eastbourne UK
It's time for the government to do the one thing that will get us spending: put more money in our pockets by reducing taxes and duties and by increasing allowances.
This will allow money to flow to the banks, treasury and retailers more naturally and less painfully than VAT reductions, QE, low interest rates and company bail outs.
It will mean less money for money-grabbing MPs and civil servants to waste on doomed projects, expenses and pensions, but maybe it's about time government started to feel the pinch too.
- Nobby Clark, Perth, Scotland
was banking ever free?
i very much doubt it, the charges may not have been upfront and advertised, but the devil was always in the detail.
- M.O'Brien, london.uk
And of course MPs and civil servants, including those at the BoE, don't have to worry about stagflation, because their pensions are index linked. Cloud (well, clod) cuckoo land!
- Hugh, Middx
Quantative easing. Just spin for plain and simple devaluation.
Adulteration is an offence and this is just another version, and is not good just because a government does it. Now if I started printing money they would have me in the caboose before two shakes of a ducks tail.
Clearly our dear Leader thinks that Mugabe has the right idea, and is taking a leaf out of his book to use in the UK.
Let's have a vote of confidence as to whether the House thinks ongoing devaluation is the right way forward and if rejected will the 'Honourable' 'gentleman' (charlattan is a better word) immediately call an election so we can truly find out what the true balance sheet looks like and start taking steps, as painful as that is going to be, to remedy the, well I struggle for the right word, fiasco, horror, shambles etc, etc.
- Hugh, Middx
never in the modern history of fiscal manipulation have interest rates been at this level, even in the two world wars and the 20's depression. we should worry about what they know that they're not telling us.
looking on the bright side, if this is the end of capitalism as we know it and let's face it,it was a fatally flawed system, heavily skeewed to the wealthy at the expense of the man in the street. then this might be the birth pangs of a brave new golden age in which justice and fairness rule supreme.
ok. . . . a poor boy can be a touch optimistic and dream, can't he?
- M.O'Brien, london.uk
Well Chris, where are you going to go? Interest rates are being cut all over the world. The United States. Japan. Where is this mythical country where savers are reaping bumper interest rates? Oh, it doesn't exist. Would you rather risk a deflationary spiral and slide in to a full blown depression to add a percentage point to your savings?
- Tony Mcmahon, London, UK
Quantitative easing has been going on in America for some time. Is it working? NO! Quantitative Easing went on in Japan for a few years, did it work? NO! So on earth the BoE think that this will!? who knows!!!?? yet so certain are they that theyve given good old Merv £150Bln - yes thats ooh around 22k for every man woman and child in the UK to go and buy some useless bits of paper and to devalue our currency.
It'll be an interesting 6 months!
- Alanj, London
To Steve Byrne. Yes WE criticise, because the idiots in charge get PAID to come up with the right answers, and as you can see, they don't know what to do, which makes them incompetent and therefore they shouldn't be working there.
If Boredom 'Doom and Bust' Clown had not been derelict in his duty as part of the Government to govern and regulate the financial markets, then things would not have been so bad (the USG should also have done their part, which they also didn't under useless bush). Brown is like a man with his pants down, and nothing much to show for it either.
- Ralph, GB
This Government has to GO!!!!!!!!!
They are a disgrace. Savers are being brutally punished.
Brown is an idiot.
I will carry on saving so I can emigrate and get away from broken Britain. Thanks alot Labour you are a joke. If you had any morals you would call an election and let Cameron take over and sort out your mess.
- Chris H, City
Lots of againsts but no suggestions as to how to get the economy going again?
i don't think we have a choice but to "print and be damned" but it will be urgent that the government claws back the cash when things get better to prevent the inflationary effects.
This I am not confident about!
- Steve Byrne, christchurch UK
Oh no! One thing we must NOT do is to print money. We have hardly let the interest rate cuts have enough time to have an effect. To encourage inflation is sheer stupidity.
And in any case "Growth" is not a green way to be. take this opportunity to reduce "growth" and accept it as a new way, kinder to the planet
- Naomi Sajeri, Manchester
Even my 13 year old knows this is idiotic, she is doing German history at school at the moment!
- Lucy, Bodmin UK
As a famous economist once said “only governments can make paper worthless just by putting ink on it”!
- Dave, herts
What message does this send out?
Wonderful news for profligate reckless borrowers and a total unmitigated five star disaster for Prudent savers like myself. Stark poverty for those on a fixed income like Pensioners.
Gee thanks Prudence!
Look how well printing fake money worked out in the Weimar Republic and Zimbabwe. They were economic powerhouses werent they?
If printing money was such a good idea then all poverty would have vanished with the invention of the printing press.
In the words of the doors...this is the end...
Final bit of the article. Experts...are these the same 'experts' who praised Crash about his handling of the economy and failed to spot the looming disaster? Frankly I'd rather rely on financial advice from my retired Greyhounds and go heavy on the dog food portfolio.
- Ethan, UK
I seem to remember that this is what the Germans did in the 1920/30's at the time of the Weimar Republic. The result was that a loaf of bread cost a wheelbarrow load of cash and was one or the reasons the Nazis came to power. We must learn from history not repeat it.
- Jeremy E, London
Another Labour winner - Stagflation. Let it rip so you can criticise the next Government as it cleans up your mess - again.
- Keith Price, Luton, England
