Morning:
8°c
BLIMEY. Hardly anyone saw that one coming. Suddenly, Mervyn King and his colleagues have gone from making the occasional trim to what a barber refers to as a “number one”. The decision to cut interest rates by 1.5% to 3% really is the full monty — a no-holds barred savage cut.
Nobody should be fooled, though. They're not doing this out of feelings of benevolence to mortgage-owners. This is panic — they must believe things are in a terrible mess to take such drastic action.
But like the poker player who decides to go for it and puts all their chips on the next card, are they right to do so? To use another analogy, firing all your bullets in one go may kill your opponent but if you miss, there's nothing left in reserve.
The Americans have done similar, to no marked effect. The Bank — and we — must pray their shock tactic works. This is not a reduction that can be ignored by the banks — it must be passed on to consumers. To not do so invites wholesale rebellion against an already discredited industry.
The housing market may just get the kick it needs and shopkeepers might get a Christmas after all. The economy could splutter into life again. What the Bank is doing is chucking worries about inflation to one side. It's growth — or rather the lack of it — that dominates the thinking now. With figures coming out every day indicating the extent of the slowdown, the MPC clearly feels it cannot ignore what is occurring any longer.
That pressure to move has been intensified, oddly, by the few rare pieces of good news — commodity and food price rises are coming down, as is the cost of fuel. Any argument that rates needed to be kept high to maintain a brake on the economy had perished.
But will it be enough? Two other steps need to happen —both of which are outside the MPC's control. The banks must move to allow customers to reap the benefit of the drop and their own inter-bank lending rate, or Libor, also needs to fall.
The major banks are reviewing their positions. There is no question — they must fall into line. Libor is trickier — it's been falling but only slowly. Until that measure lowers significantly, then swathes of the economy will remain paralysed (if the banks do not even lend to each other, the chances of them allowing consumers and small businesses to borrow are slim).
Today's move is a kick in the right direction. It's courageous and it's a gamble. But for it to have any scintilla of hope, others must now respond in kind.
Reader views (7)
The banks cannot pass on the rate cut directly to consumers until the relationship between the base rate and LIBOR is normalised. But this should be a step in the right direction for the sake of the economy.
- Blackstone Coke, London, 07/11/2008 13:12
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My Building Society hasn't passed on the recent half percent reduction at all. Nothing makes me confident thatI will see a reduction before Xmas. 7.24% SVR seems to suit them just fine.
- John, St Albans, 07/11/2008 12:08
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This is a catastrophe for those who run prudent lives. Rather than pandering to reckless spendthrifts thriving on borrowed cash it would have been better to have slashed the personal tax take so that everyone could have some relief from New Labour's financial hell. As for Correspondent Ken -he'll eventually get his financial come-uppence
- John, Leighton Buzzard, Beds, 07/11/2008 11:53
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Try changing the headline to 'Banks must pass on rate cut to savers' and then see how popular this move is. There is no free lunch, lower charges for profligate people in debt equals lower interest payments for prudent savers. Correct me if I'm wrong here, but wasn't it overly lax lending by banks encouraged by low interest rates that got us into this mess to start with
- Derek, London, 07/11/2008 10:55
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Ken, Upper Holloway. At the age of 70 I deeply resent being called an "OAP". Also, like many older people I am still paying a mortgage and am delighted that my bank has promised to pass on the cut in full.
- Janet, London, UK, 07/11/2008 10:31
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If certain banks refuse to make a 1.5 per cent cut then we, the consumers, will naturally take our business to thosebanks that do. It's called natural justice.
- Keith Price, Luton, England, 06/11/2008 18:34
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So farewell then, Bank of England Independence,
You learnt to love inflation in the end,
Good news for the feckless
Hard cheese for OAP's.
- Ken, Upper Holloway, 06/11/2008 16:01
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