UK News

Insights from the UK and beyond

Rate cut round-up: “policy mistake” or “confidence boost”?

February 5, 2009

The Bank of England’s decision to cut interest rates to a record low of 1.0 percent may have been widely predicted, but this did little to hold back the avalanche of commentary that began the moment the news came through at noon today.

Interest rates, which have now been cut five months in a row, are at the lowest level in the Bank’s 315-year history, and the list of people calling yet another easing pointless appeared to be getting longer.

Economist Ros Altman, writing on www.theguardian.co.uk, said: “This is another policy mistake. More panic cuts are not the answer to our economic crisis. Policymakers are desperately trying to boost the flagging economy and encourage more spending… but lower rates are a very crude weapon. They punish those who have got money to spend while benefiting the very groups (banks in particular) whose actions caused the mess in the first place.”

She wasn’t alone. BBC blogger Stephanie Flanders wrote: “It is hurting. But so far it isn’t working… Savers say they are being punished for nothing – rate cuts are hitting their income, while having less and less impact on the economy at large. They have a point.”

Meanwhile, Melanie Bien, of mortgage brokers Savills Private Finance, was quoted in several publications as saying: “Today’s cut was expected by the markets. It will assist those on base-rate trackers with no collars or standard variable rates if those lenders pass on any of the cut. But beyond that it will have little effect.”

The Sun didn’t hold back either, calling the rate cut a “desperate attempt to revive the flagging housing market” while The Daily Mail website said the MPC was “going for broke”.

Proponents of the drop were harder to find, but not non-existent. Ashley Seager, writing for The Guardian, said: “The argument doing the rounds that the Bank should have left interest rates at 1.5% while carrying out quantitative easing is nonsense. While it is true that the real problem has become the quantity, rather than the price, of credit, the idea that cutting rates makes no difference is simply not true.

“With around 40% of homeowners on tracker mortgages, the impact on many households’ families is immediate, and will reduce the burden on those homeowners unfortunate enough to have lost their jobs.”

Ian McCafferty, chief economic adviser to the Confederation of British Industry, was quoted as a supporter of the cut. “This drop in rates should support business confidence and, when added to recent cuts of the past couple of months and the fall in the pound, provides a very significant stimulus to the ailing economy.”

There was however a general consensus that rate cuts alone are not the answer to the economic crisis and that the Bank of England should do more to get banks lending again.

Have your say on the rate cut by posting a comment here.

Comments are closed.

  •