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We need this cut, even if it hurts more
Jonathan Prynn5 Feb 2009
It must have been a tougher call this month. As the once unthinkable happens and interest rates creep towards zero, the voices opposed to cuts get louder.
Savers are inevitably angry and frustrated as they feel they are being penalised for prudence. The Building Societies Association has also said enough is enough as it fears the flow of savings will dry up.
But step back and look at the bigger picture described by the Bank of England, and it is easy to see why a fourth consecutive cut was sanctioned. The Bank does not mince its words: “The global economy is in the throes of a severe and synchronised downturn.”
Britain's GDP is forecast to shrink by between 2.5 and 3 per cent this year, with unemployment rising to three million plus. As George Bush once said in the context of the US banking system: “This sucker's going down.”
The authorities really have no choice but to do everything they can to stop this recession, nasty and painful though it is, turning into a Depression — prolonged, destructive and hugely dangerous.
Interest rates are unlikely to go much lower, although the Bank may just tweak them by another 0.5 per cent if the downturn continues to gather pace. It is now preparing for the next phase of the operation, so called quantitative easing — in effect flooding the banking system with our money.
With interest and exchange rates at historic lows, large swathes of the banking system under state control, and the taxpayer pumping as much money into the system as it can spare, Gordon Brown can hope that he has done enough. The temporary side-effect of saver pain will for now remain a secondary concern. The desperate fight to save the patient comes first.
