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Was one point enough?

December 4, 2008

The Bank of England has cut interest rates by a whole point to 2 percent in response to increasing worries over discouraging data and a looming recession.

This week, the all-important services sector (which makes up three quarters of economic output) recorded its weakest headline index since 1996 and seventh straight month of contraction. Together with dismal news on unemployment and inflation, these surveys confirm that recession is spiralling as we reach the close of 2008.

So was the rate cut enough?

The consensus among economists polled by Reuters was indeed for a full point drop, bringing the base rate to the lowest in more than half a century after the big 1-1/2 point cut last month.

But several economists had pushed for a 1-1/2 point cut and some even thought the economic situation is dire enough to warrant zero percent.

Do you think the Bank should have been bolder?

(Please note this is an updated version of an earlier Have Your Say which asked readers how big a rate cut they thought the Bank of England should make. The announcement was made at mid-day GMT)

Comments

A 100 basis point drop today would be the correct action thus allowing potential for a further stimulus in the first quarter of 2009

Posted by Rob Atkinson | Report as abusive
 

The Bank of England will drop the interest rates to 1% to ensure that specific parties can show that they are “doing” something for the people. However if we go back 20 years ago the National Bank of Japan did the same and did it help? As there was noting to be earned on bonds all piled into the Nikkei and when the bubble burst billions were lost.

It is not a one way street, Pension Funds, Savers, Insurance Companies count on a secure and stable interest rate which is above inflation to secure an income. If this is not there all take risks which should not be taken and then ?

Posted by Daniel Law | Report as abusive
 

It is confidence that needs to return to the market and to business in general and to some degree dramatically cutting rates only indicates to everyone that things are still very bad. Better to keep the powder dry at this stage and ease gradually later. The last cuts have not had a chance to work yet and further big cuts would just look like panic. What is needed is for fewer doom and gloom stories and for a more measured response from our fiscal authorities. It is very noticeable how much more panicky the stories are in our press compared to those in mainland Europe. The psychological battle against the crunch is every bit as important as the fiscal one.

Posted by paul | Report as abusive
 

Nobody knows really what to do!! But I guess the interest rate should fall to lowest half a percent and not to zero percent as this would signal that deflation has really begun.
But tangentially try the following – throw out capitalism completely and, while I am NOT a communist, think again about a few of the ideas of Karl Marx- Capitalism has really shown to have borne the fruits from the seeds of its own destruction. Why not reorganize everything and see that each receives from now on only according to his needs.
Stop certain types of speculation on the stock market especially in food so less people will need to starve to death in the underdeveloped world.
Force the energy companies to at last bring down their prices as they clearly have exploited us all when times were still good. ( The crude oil price is now a third of what it was a few weeks ago )
Forbid the up to now widespread practice on the stock exchange of what I think is known as forward selling i.e. I contract to buy say bank stock when the market is high, sell it for cash and hope by the contracted payment time agreed at the outset in the future that the value has dropped to make a quick profit.
Like Ford America CEO proposal to take a salary of one dollar in 2009 let a lot of other CEO’s do the same as they are clearly not worth the high salaries they have drawn up till now.
Oh and finally it is clear that the whole system has failed ordinary people completely. We the ordinary people must for a long time pay off the national debt none of us or our progeny will ever be able to afford.

 

A cut is required… while the Sterling rate has crossed the Euro rate, a further >= 1% would make the move decisive. This would massively devalue Sterling and drive the cost of living up in spite of falling world prices. The consumer debt-fuelled binge-spend is over; house prices are crashing; collateral is hard to come-by for individuals and businesses are facing an economic situation somewhere between dire and an apocalypse.

It looks more and more as if we’re following Japan’s 1990 lead… where real estate crashed by ~90%… followed by an 16-18 year struggle only to be decimated by the world following its lead. I think falling interest rates are now inevitable – though we need to ask about the extent to which they re-enforce the downturn. I suspect the devaluation of currency worldwide might be the lynch-pin to turn a massive recession into a depression lasting years or decades. We are no more ‘clever’ now than in the 1930s – we just think we are.

Posted by Steve | Report as abusive
 

It’s a good idea to cut rates because it does provide some help to the economy – i.e. those who can borrow can do it more cheaply. The trouble is banks don’t want to lend money to people at all so the total amount of lending is reduced. As a result the effects of rate cuts are much less than they would be in better times. This is why the government is working on two other fronts: 1) recapitalising the banks to enable them to lend more, and 2) tax cuts and other fiscal stimulation to put more money in the hands of consumers.

World goverments are trying very hard – with a lot of taxpayers money – to break a vicious cycle of selling and de-leveraging which if left unchecked would only stop when all leverage is gone from the markets .. and we’re back in the Great Depression.

My 2 cents: Have a lovely christmas .. but be prudent. At least until next summer when we should shave a better idea of how this is all going to pan out.

Posted by Duncan | Report as abusive
 

I am sure they will cut the base rate again in January. Depending on Christmas retail sales look. If they look good, they might hold off until February. If they look bad then I think they might go down to the fabled zero percent.

Posted by max | Report as abusive
 

Savers outnumber borrowers by 8:1 ( according to the governments own figures ) and savers are the people who have the disposable income to spend to help get us out of this recession. These cuts are making savers draw in their horns and as a result they penalise the very people who could get us out of this recession! The government also claims that it takes months for interest rate cuts to effect the economy so why are they cutting again when the last cuts have not taken effect? It is the flow of money and availability of credit ( at any interest rate ) that is the problem not the actual interest rate per se.

Posted by pavlo | Report as abusive
 

Cutting Rates to 2% is more than enough. If this extremely low level does not stimulate the economy then no amount of monetary policy intervention will succeed.

Gordon will have to stop tinkering around the edges with silly pranks such as 2.5% VAT reduction and go directly for taxpayer wallet stimulation.

He also needs to immediately get rid of Incapacity Benefit and impose a term limit on benefits payments to ensure that future Govt expenditure is permanently reduced.

Posted by nick | Report as abusive
 

Yes the current rate as it stands is as low as they should have gone at this time. What were we expecting – for rates to fall to zero? We need to keep in mind that these figures are all-time lows as it is…really we cannot go lower than this.

Posted by Denise | Report as abusive
 

Definitely not enough!
The BoE should have grabbed the headline from Riskbank, and slashed by a full 2% to 1%.
The Bank is trying avoid a meltdown of Pound Sterling with today’s limited 1% cut.
But there is no way to prevent the inevitable.
We will see Rates at ½%, and the Sterling selling at 1.35 to the Dollar by March ’09.

Posted by Andy | Report as abusive
 

3.5% War Loan is looking good as bank rate sinks further. This may be an opportune time for the government to redeem this stock at face value.

Posted by Donal | Report as abusive
 

The MPC has made the right decision in bring rate cuts down to 2&, the more imp issue is whether the banks and building societies will pass on that rate cut to us, the consumers. Some it seems, are passing on the cut in full, but others may very well not. Remains to be seen…

Posted by Rahul | Report as abusive
 

The BoE has made the right move, and in typical british fashion, we’re running it down, claiming it to be a rubbish move, or one that will not help the economy. Every little bit helps, and frankly we cannot keep going lower.

Posted by Alison | Report as abusive
 

The situation is clearly difficult, and I cannot see how historical fiscal measures can address the issues at hand.
An economic boom has been readily fuelled by debt and easy access to more debt.
Some have profited (measured in the tens of millions) for ensuring this bubble.
Now there is a significant minority in way too deep. There is the threat of significant unemployment, this will mean significantly more arrears, more reposessions and possibly taking significant numbers of properties into public ownership (well, we now part own the banks so why not). The alternative is people literally on the streets because they were entering the markets (stock, housing or employment, take your pick) at the wrong time.
What’s amazing is how we have all been conditioned to think that “we” have created this problem, when in reality there is a very small minority who have made sums many couldn’t dream of earning in a lifetime, but who now get to walk away without any accountability or pain.
There are companies whose owners (the shareholders) have seen their investments priced down by 90% or more, but do the executives suffer any financial hardhsip as a result – alas in all too few cases the answer is no.
I worry we will see a return to the days of the haves, and havenots, so if you can pay your rent or mortgage, feed your family and have work to go to each day, good luck to you, and if not, you have my deepest sypathy for what may lie ahead. I just hope I may be wrong.

Posted by Andy | Report as abusive
 

I think 2% should be as far as it goes. We are getting very close to a situation where for practical purposes, the use of money costs nothing at all. In that scenario, the complete collapse of the economy could be imminent, because if the interest rate cuts do not do the trick, the next logical event can only be a collapse of prices – deflation. If we can’t be tempted to buy things with money we haven’t got and which costs us virtually nothing, perhaps we may be tempted to do so if prices fall 50%. We really are teetering on the brink of a very nasty precipice. If all this cheap money is lent to stupid people (the ones who got us into this mess in the first place) who won’t be able to afford the repayments when the rate goes back up to 4% (i.e. when it doubles), heaven help us all.

Posted by Matthew | Report as abusive
 

Rate cuts are fine as they stand, any more and we may be propping up consumer confidence, but we’ll be setting ourselves up for a giant fall.

Posted by mark | Report as abusive
 

The MPC made a justifiable move – we’ve got to take on whatever measures possible to put money back into the economy. Even though the rate cut will hurt savers, at the moment the borrowing issue is the largest threat that needs to be resolved.

Posted by LL | Report as abusive
 

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