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Are interest rates at one percent the answer?

February 5, 2009

The Bank of England has gone into further into uncharted territory with its decision to cut rates by half a point to just one percent. Many economists think they will be down to zero by the Spring.

But like gunfighter running out of bullets, the Bank is, in the view of some observers, just wasting ammunition by using the interest rate weapon.

The problem lies, they say, in the availability of credit, not the price of it. What use is a nice cheap loan on a house if a bank is demanding a whopping 25 percent deposit?

Do you think the Bank of England could do more to stimulate confidence and get credit flowing again — and if so, what could the central bank or the government do?

Comments

Of course they are a good idea.i’ve got a huge variable discounted tracker mortgage.Its only those people who elected to reduce risk with a fixed rate that are now being annoyed. On a more sensible note why havent some of teh MPC members who kept the rates so high for so long and exacerbated this recession gracefully resigned ?

Posted by paulo | Report as abusive
 

There are pros and cons for cutting interest rates. At this extremely low level the arguments against have it. Rates have never been cut as low before, and there must be a reason. Firstly it is a sign of panic, and undermines confidence further – the European Central Bank has refused to take this course. Secondly it undermines the value of the pound, making us pay much more on our foreign loans and our imports. Thirdly it removes the incentive to keep money invested, at least in this country, depriving our banks of much needed deposits. Fourthly, it hurts pensioners, especially those who have little money and can hardly afford to heat their homes. But the banks will benefit in greater profit margins, if that is any consolation.
The recession is a global one and cutting British interest rates will do little to get the economy going again. What we need is to regain confidence – and panic measures like near zero interest rates undermine confidence.

Posted by John Birch | Report as abusive
 

Can’t agree more with Stephen’s article. The only thing, which the lower rate will achieve is to weaken sterling even further, driving the cost of import higher and potentially creating a risk of double digit inflation in 12-18 months, when the cost of imported goods filter through the economy. Britain hardly produces anything these days, so it’s not realy helping the export. But maybe that is the point. Maybe the high inflation in 12-18 months is the way how to get Britain out of debt.

Posted by Mark | Report as abusive
 

Once again the Bank of England is behaving like a headless chicken, nothing fits the financial modules that they had all been educated in and brought up with, so what do they do, follow America again, despite there being no sign of an upturn there and it being the source of the Banking problems. These rate cuts are once again only serving to improve the Banks own profit margins, to suggest the answer is to borrow our way out of the problem is frightening. The whole process of continually throwing more money to support the Banks who apparently hold no records of their true debt exposure is lunacy.
If something falls off a cliff you dont throw lots of items over with it, in the hope it will be okay at the bottom, you wait for all the damage to be apparent then start the repair. No past recessions have been avoided or stopped in their tracks, it happens every so often as a correction to our madness, the longer the correction is slowed down the later the recovery. As for savers, I heard that one building society had 7 savers for each mortgage, that savings money will now have to be raided and eroded in the light of the low interest rates, less money available to lend, and savers having less money to spend in the high street.
With a falling exchange rate the next problem must surely be inflation as most goods are now imported as the country had developed as a service industry.
I have been through 2 recessions that ran their course and we came out okay, with this one we are just digging a deeper hole.

 

The problem is that despite everything that’s been done thus far, the bank’s just still aren’t lending. There’s been two bailouts, a little covert quantative easing (read the fine print of the second bailout) and, whilst low rates help domestic consumer finances and demand, the main problem is still credit. This needs to flow more freely. There’s now talk of a bad asset bank. It’s bad enough how much the government has already exchanged public debt for private debt. Whilst the impression given by the Government has been one of action, there’s a feeling of Northern Rock response to all this. I just get the feeling that the Government (and with them the BoE) is just doing anything to avoid policies that are associated with Robert Mugabe. Print money to cushion this recession before it goes to far. Load the banks with cash and it’ll burn a hole in their balance sheets and they’ll no option but to lend the stuff. Whilst this will build in inflationary pressures for the long run, worry about that once the crash landing has been softened.

Posted by andy | Report as abusive
 

Let’s have a sliding scale if interest rates :

starting at 0% for those in their 20′s
and rising to 10% for pensioners

then everybody will be happy

Smile

 

The Govt/MPC are in panic mode. The risk is that they will send the Pound lower (inflationary) and in the process drive up medium/long Gilt yields further. This will further increase Govt borrowing costs and the risk of a Govt funding crisis.

Savers (esp. aged 50+) are likely to react to falling interest rates (and hence savings income) by pairing spending. Borrowers (many aged below 50) are increasing savings anyway as protection against unemployment and face falling incomes (lower overtime payments, smaller bonus payments and salary increments, lower business demand for the self employed etc) so interest rate cuts may not boost their spending by very much.

Posted by David | Report as abusive
 

Lower interest rates – yes, and the cycle should have started much earlier. However, at the current level it’s all academic.
As Jones & Andy point out above, it all has the nasty whiff of panic and electioneering about it now.
On the basis of not listening to politicians and doing my own homework, the world outlook looks quite grim for the midterm.
That said, if 3% won’t work, why will 2% or 1%? They’re all low by modern standards.

Posted by Spike | Report as abusive
 

I’d rather like to know at what point interest rates will head upwards and how far? This is something worries me desperately. I’m a typical overly indebted mortgage borrower. Not because I borrowed to much on a multiple of income, but as regards the amount of equity I’ve in my home bought 2007. My reaction to rate cuts has just been to maintain payments at the original rate to pay down the mortgage more quickly. I don’t feel enriched by these rate cuts because i figure that my home is down about 60,000 and my equity is probably sliding into negativity.
So if the plan is to get people like me to go out and spend money it will not work.

Posted by Trevor | Report as abusive
 

No it is not the answer. The banks are still not lending, and the cut in interest rates is unlikely to change this. The major shareholder in many banks (The Government) should force them to lend a proportion of their new found ‘Bail Out’ wealth.
On a related topic……………..

My son and daughter in law have always been spendthrift and with the benefit of their new lower 1.55% Tracker Mortgage, they now can afford more than ever to indulge themselves in meals out,new kitchen, take aways and expensive short breaks. Keeps the economy going……..Gordon should award them medals as heroes of his brand of capitalism.
On the other hand my wife and I who are pensioners have just taken a £3500 cut in our interest earnings. Fair or What ??????

Posted by Dan | Report as abusive
 

I would be surprised if the Bank of England raised rates above 1% for the next 10 years. I think we will have to get used to 1% as being a high interest rate.

Posted by Tim Worlock | Report as abusive
 

the lowering of rates will only work if everybody is like Dan’s son and spend what they save on their mortgages. 51% of mortgages are fixed rate, so don’t get affected. The buy-to-let sector won’t be spending anymore, and the major advice coming out of the ‘financial sages’ is to pay down the capital of the mortgage to avoid negative equity….so who will spend to kick start the economy ? Why didn’t the govt stop bailing out all the banks and let a few go to the wall, and spend the cash investing in public projects (but not the olympics !)

Posted by Bob | Report as abusive
 

I cannot understand how the so-called financial experts do not have a clue what to do. There is no other occupation where management don’t know how to manage their business. The only thing they seem to be expert at is feathering their own nests. The whole financial system needs a good shake-up. Closing down the Stock Exchange would be a good start. Nationalising the Banks would also help.

Posted by John Worth | Report as abusive
 

If rates go back up to 3% they will have TREBLED. Obvious but nevertheless scary. If the Bank guaranteed that rates would never go back up to that level, or 5%, 7%, 10% or 15%, that would be different. As it is, a lot of people will be caught with their pants down over this in a few years, and we’ll have another crisis on our hands.

Posted by Matthew | Report as abusive
 

Its all about a race to the bottom…….. They would have cut further except panic would set in. However depression is now inevitable and unavoidable.

Posted by Andy | Report as abusive
 

Low interest rates are a good first step, but having had our fingers burnt we will remain cautious spenders for a while. Japan has had exactly this problem for years, consumers only spend when they NEED to rather than buying what they WANT.
This will result in a lower level of economic activity – fewer cars, TVs, investments and property purchases, so there will be less GDP to be shared out and it might be a lot less. Low interest may not last for long, within a 5 year time span we could have 2 changes of Government or at least Govt policy.
We are in uncharted, uncertain times 20 years ago rates peaked at 15% and were around 10% for years before that and a guaranteed long term fixed rate mortgage would be attractive to me at a premium above todays rates.
Brown and his Keynesian economics are right so far but probably will not be the end game, we must not forget the 1930s depression only ended with WW2

We can only guess the timing and outcome

Posted by David | Report as abusive
 

Oh Boy.. We really do appear to have the wrong team in place in the Bank of England.. Don,t we ?

Posted by Libra | Report as abusive
 

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