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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.
Reader views (5)
"The temporary side-effect of saver pain will for now remain a secondary concern. The desperate fight to save the patient comes first" What a load of rubbish! Savers - it is not your responsibilty to bail out idiots! you should consider ditching all savings accounts and put money into unproductive yet profitable gold or oil assets. lets see how long "the patient" (i.e. those who got us into this mess in the first place) survives then.
- Zady, london, 06/02/2009 00:53
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I'm afraid I can't quite agree.
The message this rate gives is that capital costs nothing, and it almost begs people to maximize their debts. Which just so happens to be the main reason that the US and the UK are in such dire straits at the moment. Households having trouble servicing their mortgage because they're so deep in debt.
It also tells banks that they will *not* be compensated for any risky loans they extend now. If I were a banker, I would refuse to extend loans on those conditions: the rewards aren't worth the risks. Not openly of course, but there's always a way.
If you want to pump money into the economy, offer state guarantees for mortgages and keep interest rates at 3.5%
- Golodh, London, UK, 05/02/2009 16:54
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same old story. Politicians having presided over a decade long orgy of private and public profligacy have no solution but more frantic spending and living beyond our means. It will not work, it never has before.
- Len Moss, burgess hill, 05/02/2009 15:33
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Savers have long memories, and won't be prudent in future.
Time for some new thinking in the Government, and a lot of pruning so they too can 'feel the pain' - hypocrites !
- Cap, London, 05/02/2009 14:54
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If you want to use the medical analolgy,treatment was never used unless it was judged effective, for fear of side effects. The drop in interest rates will be counterproductive if not harmful for bank deposits,and will not increase bank lending or help businesses who have credit, who are suffering from lack in demand spending.
- Michael Hargrave, Surbiton UK, 05/02/2009 14:48
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