Morning:
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It no doubt sounds like heresy to suggest to the dozens of city economists who have demanded and got a further cut in interest rates today from the Bank of England that this was probably a reduction we could have done without.
This is not because the economy is on the mend - it clearly is not yet. Rather it is that the problems it still faces are not going to be solved by shaving a further fraction off rates which were already as low as any we have seen in our lifetimes. Indeed it does no one any favours to continue to suggest that lower interest rates will be our salvation.
The economy is suffering because credit is scarce not because it is too expensive and because confidence has collapsed. Businessmen who have deferred investment because of the economic uncertainty are not suddenly going to become optimists because rates are now a shade lower.
Shoppers nursing their spending money are not
going to feel richer - the more so because this further cut is unlikely to show through as a reduction in what they pay on their credit and store cards. People struggling with their mortgages, or companies with their overdrafts will not feel any benefit because it is unlikely to be passed on directly.
Actually in this regard other rates matter more and they are already moving the right way. The Libor rate, which is much more closely aligned to what people actually pay has already fallen quite a bit in the last few days and is unlikely to respond much to another downward tug from the Monetary Policy Committee.
Indeed there is a danger that further cuts like this could be counterproductive in their effects on sterling and on savers. Sterling as everyone knows has dropped sharply in recent months and this must shortly show through in higher prices on imports. That in itself is not a problem, and one offset by the gains in export competitiveness.
But each rate cut tends to make sterling weaker as it makes it a less attractive currency for foreign investors to hold. After its plunge, the pound is getting to the point where it needs to be stabilised, not pushed lower still by another rate cut.
Second there is the effect on savers. There are millions of people - many of them pensioners - who rely on the interest on their savings to boost their incomes and who face real hardship as rates plunge. Even at this late hour they deserve to be protected. The damage a cut would do to them seems much greater than the gains it will deliver to everyone else. This should be it for interest rates. It is time to turn to other measures.
Reader views (7)
The banks are making all the right noises regarding lending to appease the government but they are looking for any excuse not to offer funds. Certain banks mainly Bank of Ireland are agreeing terms then holding out for months before declaring that they are not in a position to lend. They are simply waiting too see if their credit line is extended at the expense & demise of the public
- John F, london, 12/01/2009 15:02
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Brown's economic stewardship of this country over the last decade has been a total catastrophe - he knows it ,it is written in his face and the rest of the country will know it in just a few more months of precipitous decline.Savers are being robbed by New Labour to try and put right the results of its incompetence.
- Chris Davies, Stalybridge UK, 08/01/2009 23:53
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The latest cut in bank rate is like pushing on a piece of string ie it will achieve nothing apart from making saving even more unattractive. The problem which needs to be solved is the reduction in the amount of lending. The cut in bank rate will do nothing to solve this but may well result in a further decline in the exchange rate. The effects of this in terms of higher costs for imported goods of all kinds have yet to be felt.
- Richard Shaw, Pinner UK (London Borough of Hillngdon), 08/01/2009 22:46
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Your are right it is 'the lack of liquidity stupid' not the cost of borrowing. This only helps moprtgage holders with good credit ratings on tracker/ variable mortages - a bonus for those who do not need help but hey nobody said life was fair.
- Paul, E, UKdinburgh, 08/01/2009 15:34
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Very well said ....I couldn't agree more.
It's a shame you're not in the driving seat instead of these other so called experts.
- John, London, 08/01/2009 13:13
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OK so what's your solution ?
You are merely stating something that is obvious if your assumptions are correct.
The reality is that rate cuts take some time to have their effect, hopefully we should see some response in the next month or so.
- Carl, London, 08/01/2009 13:12
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local authorities also rely on the interest from savings and investments to keep council tax increases down!
- J Terry, Ipswich Suffolk, 08/01/2009 12:13
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