Morning:
8°c
The major bank chief executive levelled me with a steely gaze. I'd asked him what would happen when interest rates reach 0 per cent — what would it mean for me? “We charge you to look after your money,” he said. When I gulped, he added: “It's all very well the Bank cutting rates but it seems to forget we're under a duty to our shareholders to make a profit. We will have to start charging again.”
Presumably, the Monetary Policy Committee is well aware of where we're heading with today's decision. But I have to wonder.
When consumer groups and the media rise up in arms at the reimposition of bank charges, will the members of the MPC lean back in their chairs and consider it a job well done? For make no mistake, that moment is nearing.
I question whether they belong in the real world — the one where banks are mandated to produce a return for their owners. The one, too, where savers put away their hard-earned cash and receive something back. It's also the one that has faith in its central bankers, that looks to them for reassurance. The MPC has been cutting for months now and the scalp is virtually bald. Constant trimming has not achieved the desired result — the patient is in just as ugly shape as when they began.
Our world, and not the MPC's, is under a blanket recession. The banks, having lost vast sums, are intent on hoarding their cash.
Will another 0.5 per cent off the top make a difference? Will it heck. As Ian McCafferty, CBI chief economist, says: “The conventional rate cutting tool is becoming less and less effective as a means of stimulating the economy.
The Bank suspects that too — so, while it is continuing down the path of changing rates in the belief that some consumer confidence will return, it fears the move won't be enough. We're also almost at zero. The other device is the printing of more money or in the jargon, quantitative easing. The danger is that the increased money supply will cause inflation. But the UK economy is so weak that the medics at the MPC are in the mood to seize upon anything: there is this textbook method, you can sense them thinking, why not give it a go?
Why not indeed? As with most medicines, the trick is in getting the dosage right. And we won't know immediately — the lasting, serious side-effects may not become apparent for some time. What the MPC is looking for is a short-term, immediate response, that the banks, having received extra money, begin handing it out again.
It's not expected to be a total cure — the clue is in the word “easing”. It's intended merely as an analgesic. The underlying problem is still the toxic assets held by the banks. Until that is removed by radical surgery, by putting all the noxious stuff into one “bad” bank, they are unlikely to regain strength to lend. More treatment is required, before this nasty disease is finally eradicated.
