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Does the Bank Rate matter?

Robert Peston | 09:37 UK time, Thursday, 8 January 2009

There is a good deal in Evan Davis's remarks this morning on Today that all the fuss about whether the Bank of England should cut interest rates may be the equivalent of bald men arguing over who should have the comb - and his apology to my old friend Roger Bootle, a follicularly challenged economist, was priceless.

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To return to my boring refrain of the past 18 months, the biggest problem for our economy is not the price of money but the availability of it. Banks are contracting the amount they lend. So the question is whether a cut in the Bank of England's policy rate to a historic low would increase the supply of credit.

In normal times, a cut in the Bank Rate would help to boost the flow of new lending. But right now it's not clear that a reduction would have much positive impact

The reason is that the main headache for the banks is that both regulators and markets are forcing them to hold more capital relative to their loans, their assets.

The risks of lending are perceived to have increased. So lenders to banks and also the FSA officials paid to stop banks falling over want them to hold more capital as a cushion against future credit losses.

Capital is scarce. The main source of it right now is us, taxpayers. Banks aren't keen to be nationalised to any greater extent than happened last year. So the route the banks are taking to boost the ratio of their capital to assets is to lend less, to deleverage (to use that ghastly euphemism).

Here's the good news. When interest rates are cut, that provides an opportunity for banks to generate capital. How so?

Well if banks fail to pass on the reduced cost of funds to borrowers, such as companies and those with mortgages, banks' profits increase, which in turn boosts capital (so long as banks don't pay out the profits as dividends). To put it another way, if banks make greater profits from lending that's one of the best incentives for them to lend more.

Here's the less good news. With interest rates so low, banks are under intense and understandable political and populist pressure to maintain interest rates for savers while still passing on the rate cut to borrowers.

In other words, they are under massive pressure to generate reduced profits from lending - which of course serves as a disincentive to lend.

And as the Bank of England's Bank Rate moves closer to zero, the louder is the clamour for the banks to keep rewarding savers while charging next-to-nothing for loans.

Which would squeeze profit margins till the pips squeak.

And there's a further drain on their profit margin as interest rates fall, which is that there's an unstoppable shrinkage in the margin between their average lending rate and the 0% rate banks always pay to the millions of us who keep some of our money in current accounts that never pay interest.

All of which is to say that cutting the Bank Rate now that rates are so low won't cure the disease that's afflicting the economy - the shortage of credit. And there's a risk that cutting rates to almost zero could make the illness worse.

Which is why it won't be too many weeks before we see policies that would be the equivalent of giving a comb to a hairy economist.

These, as I've been saying for some time, would involve taxpayers lending more to businesses and households, the further nationalisation of the credit-creation system.

What's still unclear is what form this nationalisation will take.

It could involve taxpayer guarantees for some bank loans. It could involve extracting loss-making assets or toxic loans from banks, to give the banks greater confidence that their capital won't be eroded. It could involve the state taking direct control of the provision of some credit to the real economy.

There's a massive amount of work on all this going on in the Treasury. And ministers are doing a great deal of agonizing about it all. The results of that agonising matter a great deal more than whatever decision is taken today by the Bank of England on interest rates.

Comments

Page 1 of 5

  • Comment number 1.

    The problem is chronic short termism in Government policy. I really wish Brown had called that phantom election in autumn 2007, since whoever formed the subsequent Government would have a nice cushion of up to four remaining years in which to sort things out. But the electoral timetable now means that Brown is desperate to get results as quickly as possible and the future can go hang as far as he is concerned. So we will get short term palliatives which are likely to make things much worse in the longer term.

  • Comment number 2.

    The additional taxpayer support --- vainly trying to keep total lending at bubble levels --- will lead to a huge increase in govenment borrowing. Ultimately, the British govenement will default on its debts by creating inflation.

  • Comment number 3.

    There comes a point where BoE rate cuts have no effect.
    Commercial banks, like all businesses, have to make a profit. They cannot lend at less than 3% interest because this is roughly the minimum required to cover their admin' costs, the necesary premium for risk, and still make a very small profit on the loan.
    The biggest effect of BoE rate custs is to devalue sterling. I think sterling is too low at present (having lost 30% of its value), as we in Britain are too reliant on imports. However, some economists believe the weak pound is a good thing becasue it helps exports. Only time will tell who is right.

  • Comment number 4.

    "Does the Bank rate Matter?" is the headline.

    To savers yes, its going to be another kick in the face today when the base rate is dropped.

  • Comment number 5.

    Very interesting article. Perhaps someone, or yourself Robert, could enlighten me on the following.....

    There has been a massacre in the Banking business - one which is still going on. If this had happened in any other industry, one of the first things that I would have expected to see was NEW competition.

    Is there any possibility of a brand new bank being set up by someone with some brains who realises that the competition is so paralised that they could not possibly fight of the newcomer?

    Imagine, a bank with REAL reseves able to lend REAL cash to people who need it (such as #56 from yesterday).

  • Comment number 6.

    We have clearly been lied to by the government over the extend and depth of the recession, which is largely of their creation. They are about to drip out another estimate in the budget.

    Now we are about to subject to the risks of printing money and consequent hyper-inflation without even being consulted.

    At the same time the government is spinning that no such action in being considered.

    We cannot trust the government to act in our interests.

    The people of the country should decide which strategy they wish to pursue: Labour’s spend your way out of recession or the Tories’ save your way out of it.

    The outcome for the country is potentially catastrophic.

    It’s far too important a decision to be left in the hands of governments with vested interests in self perpetuation.

  • Comment number 7.

    It's not even complicated. Money needs to flow, from whatever source, to those businesses that make a real contribution to Britain's wealth and will do so in the future recovery.

    At the same time, it needs to be impressed upon ministers that it SHOULD NOT flow in the quantities it used to to those businesses which in the long-run make us all poor, that is to say, should not be used to make individuals more indebted to buy tat they don't need from abroad, and absolutely should not be used to prop house prices up at stupid levels.

  • Comment number 8.

    As a saver, and someone who did not perpetuate the house price boom (as it would have been a feckless thing to do) the lowering of rates comes as a slap in the face of prudence.

    If rates go much lower I will withdraw all of my savings and place them in a deposit box, as I refuse to let my cash be used a tool to prop up these one sided attempts to recover a situation that was not of my making.

    I can only hope that enough people do the same, to send a message that the steadfast saver should not be exploited in such an unjust manner.

  • Comment number 9.

    Re credit see simple example.

    1) If I buy a car under HP then one of two things will happen.

    a) For the next 36 months I will have less to spend or
    b) For the next 36 months I will need to have more income.

    For the last 10 years the individual buying and property buying in this country and US has been based on the fact that there is a third option

    c) For the next 36 months I will obtain more credit to enable me to keep spending at the same rate as before without needing any more income.

    2) Now c) is not available as an option.
    b) is not easy to achieve which leaves a), spend less. This effect has been delayed by Christmas for individuals but must start hitting home now.

    3) The government is now making the same mistakes by not following the rules of a) or b) in some vain hope that at the end of the 36 months something will either a) magically appear or b) it won't be their problem because the Tories will be holding the baby (note this does not mean I think they will be any better at it!)

    A lot of people on this website are described as doom - mongers. We have to accept that we are in a very frightening postion for many many people and the action being taken is only dealying the inevitable and making the problem bigger in the long run.

  • Comment number 10.

    A point that has not been made is that the banks are not lending because there are few out there who have both satisfactory collateral and also the ability to service a loan in these financially fraught times.

    There is no point in lending when it is virtually a dead cert that what is lent is going to go down the pan!

    The companies that are viable do not want to expand at the beginning of a recession.
    It is mainly the businesses that are on their last legs that want more credit. Why throw good money after bad?

    The bank rate really does not matter

  • Comment number 11.

    It was inevitable that a 'solution' of the type tried by Brown last year would only hold the line for a short while, until the contradictions became apparent somewhere else in the system. Reductio ad absurdum.

    Now not even the Germans can get their bonds away: reducing interest-rates still further at these low levels has none of the desired impact: and for the reasons Robert gives above, all manner of extreme practical consequences are emerging that (despite all the "massive amount of work going on in the Treasury" - which I can confirm) the government is most unlikely to be able to manage.

    This is coming to a head, and fast. So - for a man who is ultimately a political animal like Brown - an early election would seem to be a logical part of the escape plan ?

  • Comment number 12.

    Robert - shortage of credit is not the problem, it's the shortage of NEW credit. The UK consumer and corporate sectors have both become credit junkies, needing a 'fix' to avoid bankruptcy, overextension and much else.

    What is cruelly problematic for Mervyn King
    (a man whose detailed practical and theoretical knowledge of broad money policy in the UK is second to none) is that it isn't at all clear that measures to reduce what the '30s economists used to call (rather quaintly) 'idle money balances' would be any more effective at this point from an increase in direct liquidity to the system ('printing more money' for instance) than from reductions in interest rates.

    What is needed is a strong form of that old Bank of England tactic 'moral suasion' - in short, the bank and HMT have to lean on the lenders, hard. They have to do all in their power short of nationalisation (I hope) to persuade/cajole/threaten the financial institutions of the UK to play the game.

    That is a perverse situation to be in, of course - a bit like a policeman forcing a drug dealer to allow an addict their fix! Then again we live in interesting times....

  • Comment number 13.

    Robert,

    An excellent blog covering some very important points. It has been evident for some time that political statements regarding what the banks should do does not accord with the rules the government require the banks to operate under. If they are required to hold more capital then they MUST lend less, and the government should be making statements that are more coherent.

    With respect to interest rates, the baldness analogy used is spot on – rates are already effectively zero and any further tinkering will make no difference and even as you suggest may make things worse by denuding banks of capital.

    If there were no move in interest rates today it may also go some way to restoring confidence in our battered currency which would be desirable for a country that is a large net importer – that is we import more than we export rather than we import large nets.

  • Comment number 14.

    I am at a loss to comprehend why the Government has to encourage 'financial institutions' to increase the flow of credit. Somewhere in the dim and distance past I am sure there was something called local authority mortgages. Why can't the Government cut out the middle person and lend-sensibly-to small business and inividuals direct?

  • Comment number 15.

    One thing for sure, long term lessons must not be forgotten.

    Taking "toxic" loans away from the banks is tantamount to exempting them from stupid mistakes of the past.

    For an economy to flourish, (Thats long term - not just for the life of this government Gordon!) bad behaviour must be seen to have bad consequences and this includes for banks and bankers.

    When I studied economics I was told that higher risk = higher potential reward, so why at a time of higher perceived, (not real 'cos GB is going to guarantee these loans) are rates being cut?

    Has anyone done the sums and figured out just how many seniors are cutting back their spending and what the impact of that will be?

    One digression if I may - at the hotel where they found all those Rumanians working illegally by producing forged Portugese documents - did anyone check whether they could actually speak Portugese????

  • Comment number 16.

    If the government paid off all our personal debt, bank loans, credit cards, mortgages, etc.
    The banks would have lots of money to lend and being debt free we could all set the bubble off again.

    Of course next time time round all the prudent savers could join in as well. Obviously we could only buy things produced in this country as the pound would be worthless abroad, but hey if the word secretly got around beforehand we could stock pile loads of stuff in advance.

    There is always a KISS solution somewhere.

  • Comment number 17.

    #3 - banks can not lend at less than 3%??

    Surely a bank lends at a fixed margin above base so on the same level of borrowing would make the same income to cover its costs???

    The problem is more attracting the savers as interest rates on savings at virtually nil make it pointless putting money in a bank so there is no credit to give out.

  • Comment number 18.

    I hope the BoE does nothing with interest rates. There appears to be no advantage to the economy in so doing.

    The banks have already indicated that they will not be passing on any reduction and we will therefore not see any advantage.

    On a very personal note the maintenance of the existing rate will help to maintain (maybe increase) the exchange rate value of the pound against the US dollar.

    The really interesting point is what do we do to try and release the necessary credit flows for business and individuals. It is clear that the banks are not willing to do so. Perhaps this is a good thing. After all they have proved to be poor decision makers and reckless in the recent past!

    Perhaps this will be the key to Robert's New Economy

  • Comment number 19.

    if they are deleveraging with tax payers money it defeats the objective

    may as well nationalise them and get it over and done with

    blatantly obvious though Bert you are not in business - even if you can get a base rate deal which is extremely unlikely you will be paying at least 4% above it so the banks can more than cover their costs

  • Comment number 20.

    One thing is forgotten re bank base rate cuts and tracker mortgages is that many people's payments are only adjusted annually.

    My mortgage is with Barclays / Woolwich and my payments were fixed in September 2008 based on a bank base rate of 5% plus the load for the tracker.

    My payments won't reduce till October 2009 and whilst I am overpaying on my mortgage, and may well be overpaying by more by this afternoon.

    I'm sure Barclays is not alone in annual amendments both for tracker mortages and Standard Variable Rates.

    At present many people are effectively over paying their mortgage and don't have anything extra in their pocket so for me and them the mortgage rate cuts whilst nice hasn't seen a boost to may wallet, at least not yet.

  • Comment number 21.

    The economists and politicians have missed the point again becuase they do not live in the real world like most of us. I have no interest in banks lending me money. I am busy saving what i can in case i loose my job and to make sure i can stay out of negative equity on my house. Business needs to borrow, but consumers will not buy until they feel financially safe and for 12 million mortgage holders that will not happen until the housing market starts moving again. What is needed is a massive injection of money into new mortgages. When people start moving they will start doing home improvement, refurnishing and repairing which will benefit the whole economy. Any intervention elsewhere is merely fiddling while rome burns. The saving figures speak for themselves as people try and reduce their mortgage debt by making lump payments rather than buying new televisions. I am exasperated about how slow politicians and economists seem to be to wake up to the fact than fixing the housing market is the key to starting the recovery in this country where home ownership is high and most wealth is tied up in homes.

    What is worse is the banks are creating their own debt by reposessing people in a low market, forcing prices down and turning potential loss into real loss and destroying families in the process. Its a vicious circle and judges should be refusing repossessions except for in the most dire of circumstances.

  • Comment number 22.

    Banks don't lend based on a personal judgement, they lend based on their capital adequacy ratios. These are based on very complex calculations which forecast risk into the future. One of the key issues affecting risk is diversification, in other words, if market movements in the retail sector are not linked to market movements in the construction sector, they can lend more.

    The problem with the credit crunch is different business sectors have become correlated. Correlation means less risk diversification, which means more risk, which means Banks need to see aside more money, WHICH MEANS LESS MONEY TO LEND!

    In a non correlated market, the interest rate would have impacted more than just home owners, but also it's credit appetite, now it simply affects home owners and not Banks willingness to lend.

  • Comment number 23.

    Sooner or later we're going to be a 0% rate or thereabouts. What then? We surely can't cut them further!

    As a layman, from what I see cutting interest rates in the past few months has achieved little except the devaluation of the pound and a few lucky people get to pay less on their mortgage.

    It's certainly not getting the banks to lend any extra and hardly anyone I know is benefitting from a temporary increase in having say £100/month extra - they aren't spending it. No one wants credit at the moment and to be honest, even if you did the economy is so unstable that who knows what is next? 15% interest rates? 0% interest rates? If the banks aren't lending, there's little benefit.

    What about those who are "stranded" on fixed rate mortgages? With house prices dropping, those who's current deals end are going to be unable to move to other deals because they don't have the equity. And let's be honest, a lot of people haven't any other option having committed the "sin" of wanting to put down roots in a town to raise a family. So, there's little benefit there.

    Pensioners and people with savings are getting hammered as well, no benefit there.

    We don't have much of an export industry to drive us out of this so a low pound isn't going to make a great deal of difference. No benefit there.

    The thing is, ultimately, interest rates have been too low for too long and I speak as someone with a mortgage, pension and a small amount of savings. Reducing them further isn't helping anyone as far as I can see, and we know that as inflation kicks in next year they will no doubt rise which could then hit people.

    The whole thing is a mess, an absolute mess.

    If Brown had any bottle about him, he would nationalise the banks today and stop this "middle ground" nonsense which is benefitting no one. Any arguments about the benefits of unfettered free markets have frankly been shattered and what we need to do is set about creating the basis of the next financial model rather than trying to breathe air (money) in to the corpse of globalised, unregulated capitalism.

  • Comment number 24.

    "Does the Bank rate matter?"

    Yes - the destruction of sound money is disastrous, not only as a fact of making all savings worthless and all borrowing free, but mostly for the signal it sends to the World on how incompetent the regualtors have been and are still being.

    As a Nation we have still to come to terms with the gigantic level of monetary mismanagement. All the people responsible must go, pension-less and without massive, or indeed any pay-off. (That is the Governor, the whole MPC the Chief Executive of the FSA and the senior staf and the Principal and Department Secretaries and Under-Secretaries at the Treasury.)

    These 'incredibly skilled' and huge salaried 'wise men' created, and even have the cheek to admit they created the bubble. The admit they knew what was going on. They had the power and were given the duty by us to act. They did nothing. Ergo they must be sacked.

    If interest rates go down today the whole lot should be sacked today.

  • Comment number 25.

    My interest rate is seriously waning!

    http://blogs.ft.com/wolfforum/2008/12/central-banks-need-a-helicopter/

    We really are in trouble now if HMG start using the Mugabe model!

    looks like we're in for some uncontrolled inflation and debt deflation. Time to start investing in wheelbarrow manufacturers

    I'm off to the toilet now for some quantitative easing!

  • Comment number 26.

    I am suspicious that Government knows that a further cut will not result in significantly smaller mortgage payments or business loan interest [but will result in a proportionately greater fall in savings interest - this is just simple arithmetic]. It may even result in an 'emperor's clothes' awakening that the lever 'interest rate cuts' is now pushing on a string and thus (for all practical purposes) broken.

    However the Government debt is rather large and if it is 'valued' at current interest charges then a further cut will make Mr Brown almost look a success. Wait for the press release 'Government debt interest costs fall'....

    Hopefully Building Society Boards will ignore a rate cut completely (other than for tracker accounts). After all a reduction in 'minimum lending rate' is permissive and not imperative.

  • Comment number 27.

    To ian_the_chopper post 20. my mortgage is also with barclays on a tracker. If you phone their customer service line they will recalculate your mortgage and apply the new new rate immediately. If you don't contact them then they will leave you overpaying until october.

  • Comment number 28.

    Robert,

    The lower rates will still have a big impact on borrowers who have tracker loans and this is a massive stimulus to the economy and to the taxman.

    So it is still worth the BOE cutting.

    What is needed for the longer term is regulated lending so borrowers are vetted thoroughly and so lenders have a lower risk.

    There is more money washing around than many think!

    Also Lower rates will force those with capital to look at investing in business property or other less lazy (bank deposit) forms of investment.

    There are some massive almost Idiot-proof investment opportunities around at the moment.
    Don’t YOU think?

  • Comment number 29.

    At the very least rates should remain unchanged-better for them to increase.

    More margins for the banks, more money for savers and more money into the country.

    As we import more than export raising rates is best thing to do. Said that back in November, as did others.

    Fingers crossed.

  • Comment number 30.

    Surely, the big risk with whatever the gov does next is inflation, and ultimately much higher interest rates in coming years.

    So many people I know are spending the extra money they are saving on their normal mortage/loan paymenst because of of historically lower interest rates - which is what the government wants.

    But come next year those same people are going to be in a HUGE problem re. being able to afford those same mortages as interest rates go back up. Perhap very high and very quickly. That for me is the truly sacry thing we are all starting in the face.

    An as people on her rightly point out, Gordon and Co. probably won't be around to worry about it so won't care what they do now.

    Time for a gov of national unity, for ever there was a time to act on behal of the whole country and not indovidual parties, now is surely it.

    Decisions taken in next few weeks and months could scar a generation.

  • Comment number 31.


    We have 7 days left to show some sort of effort. Join the petition now !!

    http://petitions.number10.gov.uk/Finance/

    Come on - let's see some numbers to create debate.

  • Comment number 32.

    Robert

    Good article, we really are caught between a rock and a hard place. A further squeeze on current available credit would be the situation where savers moved their assets from locked in savings accounts, to current accounts increasing their liquidity but conversely decreasing the banks liquidity.

    Other savers may move their savings abroad where returns are higher but also "gambling" that Sterling is more likely to fall in the future months against most currencies. I have a feeling that this has already happened (but cannot provide any evidence) over the last few years - it only takes seconds to transfer GBP Billions to half around the world.

    Is the spectre of exchange controls looming?

  • Comment number 33.

    Post 17. I think what post 3 means is that for personal loans and small business loans there needs to a load of at least 3% above their own borrowing costs to cover their admin costs and their profit margins for these lendings.

    If so why are personal loans still at least 10% plus?

  • Comment number 34.

    Time to scrap the MPC and for the government to adopt a much more radical intervention involving direct, statutory, fiscal and monetary levers of economic management.

    The reduction in BR is more like over correcting a skid but the effects on saving is devasting. Indeed is it inconceivable that banks will go for negative rates for borrowers with unpredictable consequences for people and the economy?

    The continued worship of the private enterprise finance system by Labour prevents them from returning to their root beliefs on economic management but direct control through central and local government (e.g. building houses bridging loans for businesses, paying their low paid workers more instead of making them redundant) will be far more effective than anything the BoE can do.

  • Comment number 35.

    Not sure whether the mods will post this:

    http://mises.org/story/3265

    Maybe an exaplanation as to why Brown and Darling want to be seen as the "do something" party.

    Make your own minds up as to whether they are helping, and what the long term implications of thier intervention will be.

    From the article:

    "A free-market economy could certainly deal with the correcting effects of deflation. However, the coercive apparatus of government cannot: its very existence rests in great part on ever-higher amounts of credit and money, in particular to finance cascading amounts of public debt at low interest rates.

    This might explain why governments do everything they can think of to keep the current system churning out credit and money: by increasing the base money supply, cutting interest rates, spending (future) taxpayers' money on an unprecedented scale, or nationalizing the banking sector.

    However, these measures will not solve the problem brought about by circulation credit. As Mises noted,

    The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system."

  • Comment number 36.

    We have already put "countless squillions" into the banks and they havn't yet come out as they were supposed to.

    If we put more in how do we know that would come out?

    It's a guarantee that printing money will be the only option left.

    So the banks have to now be by-passed. They have made so many mistakes on such a vast scale that this has made bank Rate irrelevant as an economic tool.

  • Comment number 37.

    Phlipperz post 27 thanks for the response.

    I don't need a new car or a new tv at present and can afford the overpayment, at least at the moment, so with interest rates on savings so low I might as well keep overpaying.

    I might as well overpay now when rates are low because in a couple of years as a taxpayer I am sure I and those of us still with a job will have to pay a huge amount to sort of Gordon's mess.

    No doubt by then interest rates will be back up to encourage foreigners to bail out our economy and taxes will be up to pay for the current government's desperate attempts at survival.

  • Comment number 38.

    Great to see you mention Roger Bootle, Robert.

    Of course we all know that Roger has been scaremongering and calling the top of the market since 2001; he had to be right some day.

    There is a slow acceptance from borrowers that rates are higher than Libor/base, but this isn't a bad thing. the banks are making more margin, and for the first time in 7-10 years properties are being bought in the commercial world with positive yield. At the moment good kit can be bought for 7.5%, and even with inflated rates, it can be funded at 5.5%. At the height of craziness, Property Yields were 4%-4.5%, and people were borrowing at 5.5%-6%.

    There are deals out there for good astute borrowers. It isn't all doom and gloom.

  • Comment number 39.

    All this reduction will do is reduce deposits and a mass exodus of existing money from the banks into other investments that might offer higher yields. I just cannot understand the logic behind this race to zero rates.

    I read another report this morning on average only 0.14 per cent of the last cut was passed on to customers by mortgage lenders. Another 1% off the rate will surely not change that figure much but only reduce the interest on deposits. No new deposits equals no new lending, pretty much in the current climate.

    Another report I read this morning was, yesterday the German government couldn't auction €6bn worth of 10yr bonds. God help us if there isn't an appetite for buying Euro/German bonds given that we might be third in this queue behind the US. Maybe Darling read that report when he mentioned the printing presses are going to start working at full steam.

  • Comment number 40.

    The banks can only lend to those that want to borrow. That means that they have to lend to people who have been borrowers in the so called good times. These very borrowers are already deep in debt so why should the banks offer them more.

    HMG does just not understand how ordinary people think or behave and to blindly state that we must all carry on spending is ridiculous and will only make matters worse in the long term.

    Over 50bn was withdrawn from our houses in 2007 and spent by stupid people on big cars, exotic holidays, designer clothes etc. and this amount of money cannot be made up from another source.

    That means that the banks would have to lend an enormous amount to make up for this type of borrowing, bearing in mind that the very same people who wthdrew money from their house to fund a lifestyle they really could not afford are now scared stiff as their houses fall in value.

    Our High Street banks are being asked to lend at 2007 levels which is impossible as the Icelandic banks and many other lenders are now out of business reducing the amount of money available to lend. Anyway it was a lot of these now defunct banks that lent at the stupid levels in the first place. Are we to ask the banks that remain to repeat their mistakes?.

    I do not know where this is going to end but I personally have opened a safety deposit box for my money when the bonds I bought mature this year. We should all do this and give HMG something else to think about for preaching such remedies.

  • Comment number 41.

    Hmmm, Banks knocked again.

    Well, three big high street Banks are now owned by a Spanish Bank.

    And one is mostly owned by the Gov't.

    So any profits are either goingto Spain, or eventually to the Treasury.

    Before the profits nearly all went to UK Pension Funds.

    Makes you think.

    Interest Rates falling won't help the property market unless workers also recieve pay rises that keep up with their cost of living.

    Only then will enough people feel confident enough to buy Houses.

    Bad news for the Housebuilders and probably means their days are still numbered (and that number is falling fast).

    If the Gov't wishes to inject demand back into the consume economy it will have to accept the fact that the only way to do so is to increaes the Pay of the lowest paid workers, such as many in the Public Sector.

    Now it cannot order the Private sector to give out pay rises but it can do so in the Public sector as it controls the purse strings.

    A ten or twenty percent rise across the Public sector would restore demand in the economy and feed through to higher Sales and Higher Profits in the Private Sector businesses. And this would feed through to higher employment in the private sector and more jobs in general.

    Of course another plan is to sit on ones hands hoping that something will come out of the Blue to save the British economy.

    This might happen, but for Britain to become competitive enough internationally for that, the Pound would have to be closer to one half a Euro and One Dollar or Salaries would have to halve in the private sector.

    A stark choice.


  • Comment number 42.

    Re #20

    Overpaying a mortgage by 'fiscal drag' is good. The best investment you'll ever make. Remember the extra money pays off the capital, reducing payments into the long term.

  • Comment number 43.

    #18, foredeckdave, I agree, what is the point of reducing interest rates for the sake of it? There is no point.

    #1, crowdedisland, I also agree with your post.... Gordon Brown is desperate for short term success to enable him to win the next election.

    Gordon Brown is doing nothing to change the bubble mentality. He's still encouraging consumers to spend money that they haven't got which landed us in this mess to begin with.

    It's almost as though he assumes that pensions and savings are irrelevant now that we're in recession - who needs to retire anyway?

    I continue to maintain that Vince Cable should be in charge of the economy - he know the LibDems aren't going to get in so it's not about the politics for him. He'll get on with the job and do what needs doing.

  • Comment number 44.

    Does anyone know how much money HM Government has lost in unpaid PAYE and VAT with the Administrations of Woolworth, Zavvi, etc?? HMG no longer a secured creditor, so they will get not much either.

  • Comment number 45.

    This is another critical decision point for the government - and I hope they come out with the correct decision.....

    ..... which is to ignore the self interested posturing of the bank directors, who are still only thinking of their own personal salary and bonus arrangements (and to a much smaller extent the interests of their shareholders), and force them to raise more capital, if necessary from the tax payer.

    Post 5 is absolutely correct that in any normal market of goods, stronger players would enter if they see existing players weak and unable to invest/compete adequately, but given that this cannot happen in the banking sector, the government should force banks (again) to recapitalise.

    The sooner we can get to a Swedish solution to the situation (where the stupid banks are completely taken over by the state, recapitalised, new management installed and then set free to operate again) the sooner we will approach a normal lending situation.

    'My' government just cannot start buying up all the toxic debt, for me to take a huge loss on when:
    a. bank shareholders are still in business and earning good returns from totally incompetent managements
    b. the savings I've put aside in the good years now attract a paltry interest rate, a large portion of which is then carved off by the very same government

  • Comment number 46.

    The problem with our financial system is that all too often it finances speculation rather than investment. Also, that banks as secured creditors do not share fully or fairly in the risks of an enterprise. This gives them power to destroy a profitable company, or to benefit from irresponsible management as in the Farepak fiasco. Ie waiting until the innocent punters have paid in advance for their orders and then pulling the plug.

    We need a new model for investment, ie that it should not be the bi-product of a casino. Loans to companies should be discouraged in favour of equity stakes, and all shareholding should be for a minimum of three months. 30 day settlement terms to suppliers should be enforcable by law - indeed any attempt to write contracts to get round this should be a criminal offence. On the other hand, companies should be expected to keep enough cash to meet their short term obligations without needing loans.

    Perhaps there should be competing national and regional unit trust schemes, backed by the government, but accepting money from private investors? These could give backing to SMEs in return for an equity stake, repurchasable by the other shareholders/partners at some future date.

    The aim: any provider of finance to business should have a very strong incentive to help that business succeed, rather than pull the plug.

    I am not a businessman, merely an armchair commentator, so I won't be offended to be (politely) shot down in flames by people with more experience. However, I believe strongly that if we are to avoid the regular crises of exaggerated boom and bust, we need a new financial model.

    Any other suggestions?

  • Comment number 47.

    For those worrying about Rates of return on their savings, it is a bit like someone on the Titanic complaining to the Steward about a leaky Faucet.

    The British economy, unfortunately has depended on Financial services to supply a huge chunk of its income from abroad.

    As it stands the British economy is unable to maintain itself at its previous levels.

    Tourism may be able to pull in some more income especially if the exchange rates stay low, but alone it will not make up the difference.

    At a much lower exchange rate manufacturing MAY pick up and draw in some extra income.

    But lower exchange rates are in effect quite huge bursts of Inflation (appiled against imported goods and raw materials) and will drastically reduce the value of depositors savings.




  • Comment number 48.

    For those worrying about Rates of return on their savings, it is a bit like someone on the Titanik complaining to the Steward about a leaky Faucet.

    The British economy, unfortunately has depended on Financial services to supply a huge chunk of its income from abroad.

    As it stands the British economy is unable to maintain itself at its previous levels.

    Tourism may be able to pull in some more income especially if the exchange rates stay low, but alone it will not make up the difference.

    At a much lower exchange rate manufacturing MAY pick up and draw in some extra income.

    But lower exchange rates are in effect quite huge bursts of Inflation (appiled against imported goods and raw materials) and will drastically reduce the value of depositors savings.




  • Comment number 49.

    I am a retired person in England who regards my 'savings' as my private pension fund. When my wife and I had a mortgage the rate was always in double figures and we made sure that we could afford it; now my fund’s interest is falling to zero. This is not a good enough return and I have been looking around the world, via the internet, for a better investment. Brazil for example, or France, to take advantage of the future further falls of the pound against the Euro. I certainly no longer trust the pound. For example, any one with £100,000 in Euros would have seen an increase of value to around £140000 over the last twelve months.

    I do not understand why the interest has been reduced, it can only lead to a loss of capital to Britain and a consequence of a slump, as happened in the last century. The pound has already followed the dollar down to a drastic revaluation that must lead to seriously increased inflation.

    Is this all being done to delay the bankruptcy of badly managed banks and a minority of property developers/dealers and stupid mortgage holders who have over-borrowed; and maintain the unrealistically high property prices? I would have thought that it would be better to get the bankruptcies done to get rid of the incompetent, and place their business in more competent institutions and cleverer people.

    The removal of the incompetent banks and the drastic reduction of property prices to affordable levels would be a much securer long term solution. We have had a very long period of continued inflation, it is time for a period of deflation to balance things up and bring about a stable value of our money for future generations. It is grossly irresponsible to allow the continuous inflation of prices that erodes and devalues the value of every one's money and gives future generations very little to build on.

    As a person who owns the money I am not satisfied with any interest below 5% pa, and if the interest is not returned rapidly I will take it to where it is more valued, and respected; which will not be the stock market, but rather abroad, or property when it falls far enough. Then the UK lenders will not be able to offer cheap loans because they will not have the money to do so.

    If things continue as they are now, then the UK’s financial institutions and people’s personal savings are going to be nationalized, as were the coal mines, the railways, the car manufacturers, the steel industry, and the defence industry, and where are they now?

  • Comment number 50.

    I am a retired person in England who regards my 'savings' as my private pension fund. When my wife and I had a mortgage the rate was always in double figures and we made sure that we could afford it; now my fund’s interest is falling to zero. This is not a good enough return and I have been looking around the world, via the internet, for a better investment. Brazil for example, or France, to take advantage of the future further falls of the pound against the Euro. I certainly no longer trust the pound. For example, any one with £100,000 in Euros would have seen an increase of value to around £140000 over the last twelve months.

    I do not understand why the interest has been reduced, it can only lead to a loss of capital to Britain and a consequence of a slump, as happened in the last century. The pound has already followed the dollar down to a drastic revaluation that must lead to seriously increased inflation.

    Is this all being done to delay the bankruptcy of badly managed banks and a minority of property developers/dealers and stupid mortgage holders who have over-borrowed; and maintain the unrealistically high property prices? I would have thought that it would be better to get the bankruptcies done to get rid of the incompetent, and place their business in more competent institutions and cleverer people.

    The removal of the incompetent banks and the drastic reduction of property prices to affordable levels would be a much securer long term solution. We have had a very long period of continued inflation, it is time for a period of deflation to balance things up and bring about a stable value of our money for future generations. It is grossly irresponsible to allow the continuous inflation of prices that erodes and devalues the value of every one's money and gives future generations very little to build on.

    As a person who owns the money I am not satisfied with any interest below 5% pa, and if the interest is not returned rapidly I will take it to where it is more valued, and respected; which will not be the stock market, but rather abroad, or property when it falls far enough. Then the UK lenders will not be able to offer cheap loans because they will not have the money to do so.

    If things continue as they are now, then the UK’s financial institutions and people’s personal savings are going to be nationalized, as were the coal mines, the railways, the car manufacturers, the steel industry, and the defence industry, and where are they now?

  • Comment number 51.

    Why isn't the devaluation of sterling considered a bigger issue by the press and politicians?

    We have seen sterling devalue by ~25% against all major currencies. Every reasonably sized company in the UK uses for some portion of its supply-chain off-shore factories and foriegn built goods. The sterling devaluation has resulted in their costs increasing hugely in just a matter of weeks.

    And lets be clear, just because a UK company produces goods in a low cost economy does not mean it is not adding value to UK plc - for most of these companies the highly paid knowledge workers remain in the UK, foreign currency and profit is still brought into the country.

    Unless the pound strengthens soon, we are going to see many companies go bust, not because the availability or expense of loans but because their manufacturing or component costs have just increased by 20-30%. Not just old companies like Wedgewood’s, but high-tech companies where predominately design is carried out in the UK and manufacturing is in Eastern Europe or the Far East. Last I heard, the government was placing their hopes on high-tech growth for the future UK industry.

    Further, as the UK as a whole is net importer of goods, everything we import now costs us 25% more. Add on top of this the BoE further reducing rates and printing money as "a monetary stimulus package” how can we now not avoid both a collapse in industry and double digit inflation?

    Surely this is a bigger issue than a further 0.5% or even 2% cut in interest rates?

    What am I missing here?


  • Comment number 52.

    #21

    I am exasperated about how slow politicians and economists seem to be to wake up to the fact than fixing the housing market is the key to starting the recovery in this country

    But the housing market is fixing itself quite nicely all year. Down almost 20%. Another year or 18 months and it will be more or less fixed.

    where home ownership is high and most wealth is tied up in homes.

    But that 'wealth' isn't real. It is just an artificial artefact of the previous decade of profligate government and individual borrowing and squandering. Why should property values treble in a decade while the price of food, electrical goods, cars and practically everything else went down in value? What stroke of economic genius did these individual householders think they'd pulled by simply sitting on their duff in their house? How had they added any value to their house let alone trebling its 'value'.

    They hadn't. That money didn't exist. It was never earned. It was never there. We just have to face the reality that our houses are not piggy banks and if we want a foreign holiday or a 42" plasma TV or a new 4x4 then we'll just have to save up like every other generation before us. Oh, how boring.

    Sadly we spent the last decade being encouraged by Brown to believe that all this house inflation and borrowed money was some new economic paradigm that would continue forever. I think he might have actually believed it himself. He certainly doubled national debt and seems quite miffed that the banks have stopped lending even more to individuals so that they too can get further into debt.

    The solution is actually very simple. We work hard, do without the little luxuries we seem to think we've become entitled to and pay off the debt. We live within our means. And so should the government.

    I don't know why Brown finds it so difficult to be honest about this.

    It's that simple. As a result there will be many in banking and retail who will lose their jobs and that is unfortunate. But then you could argue they were fortunate to have a job at all these past ten years since clearly their job only existed if we all went completely bonkers spending non-existent money.

    If they hadn't been sucked into such unproductive jobs they may actually have spent the past decade diverting their energies to something more productive and sustainable. I know that sounds harsh but it really is as simple as that.

  • Comment number 53.

    Interest rates cut do not affect the average mortgage holder as much as they should.
    Its sickening to see how the inbred greed has meant banks will waive any moral right to correct the hand that feeds them. While the Bank of England (BoE) might drop rates to a potential low in over 300 years, none of it matters if the banks themselves drool and wryly point to their small print seeing the BoE drop as a golden egg to increase the money going into their coffers. A few banks pass on a token gesture of the decimal variety but 1% only always means much less to the people who have a home to run. Being told a 2% or 1% base rate means nothing. Who will benefit from this the most? Ans - The banks. Most average people will still have circa 5%(+) to pay when the BoE rate hits 1%. Thats for those people who have mortgages. For those that dont...scrape, borrow, steal the neccessary and almost impossible (min) 20% first-timers-deposit required and you too can join the other homeowners who stand NOT to benefit from the BoE rate. What a ridiculous empty hope.

    Unless the BoE rate (like for like) is not passed on, you wont boost the circle of money coming in from the single biggest expenditure in people's lives. Its not rocket science. Too many people make it so.

    Banks like to sit in their high white towers and gamble other peoples money by 'hedging' and then turn up with a very large cap in hand begging for help. (Kinda like a gambling addict hooked on casinos). The banks were quick to ask for money, quicker to shift blame for any of the situation and now wont play ball with the government who dug them out of their holes. Gordon Brown needs to put pressure on the banks and make them kneel. Otherwise the banks will drip dry the last pennies out of the economy without any moral or ethical conscience whatsoever. And when it all falls down, they will walk away with their pockets stuffed. This is what banks do. Look at the CEO's of all the banks, they feel no moral obligation whatsoever.

    Gordon - time to put the collective power of the voters who placed you in government to good use. The banks owe you. Make them pay for the loans which, hypocritically, they charge everyone else for.

  • Comment number 54.

    #17

    (i) The ineterst paid on my Nationwide cash ISA is only 1.5%. This means that Nationwide must charge its borrowers at least 3% for a mortgage, in order to cover costs, risk, and a small profit. In fact, a profit margin of only 1.5% is probably too small; so Nationwide will have to charge more than 3% to the majority of its mortgage borrowers.

    (ii) Unsecured loans are being offered at rates far in excess of the BoE rate. Barclays is currently offering unsecured loans at an APR of 9.9%, which is far in excess of the current BoE base rate of 2%

    (iii) The BoE base rate is not the rate that commerical banks actually pay for the money they borrow, as they source their funds from depositors and the wholesale money markets. Hence, LIBOR seems to be more important than the BoE base rate.

  • Comment number 55.

    I agree that any further rate reduction will have virtually no impact.
    With rates as they are I can get an unsecured loan of £10,000 - £20,000 at 7.9%. If the Bank rate reduces the rate I'm offered will, I am sure, be hardly any different.
    I'd like the money for various things but I don't need it and being a cautious soul I will not be taking a loan out. I have no excess money each month - (my resolution is to live within my means) so I am actively seeking ways to reduce my spending.

    I work in the private sector and although I think my job is relatively secure I'm not certain so my confidence is not high enough for me to take out a loan. There must be millions in the same situation (or a lot worse off).

    VAT reduction has been a total waste of time - I think an income tax reduction would have worked better.

    Gordon will have to appeal to the people who have benefitted most from his term in office - those in the public sector - they are less likely to lose their jobs so should have more confidence for the future.

    Confidence and cash are the critical things and both are in short supply.

  • Comment number 56.

    One other problem faced by British manufacturing is the deskilling process begun under Thatchers Gov't and not yet reversed.

    You see it is much easier to buy in finished goods for resale (as a Merchant) rather than produce the goods yourself as a manufacturer.

    As a simple Merchant one does not have to worry about factory machinery , training of staff, discipline of staff, pay disputes, raw materials etc, etc.

    All you need do is inspect the quality before buying and if you do not like it you award the contract to a different manufacturer.

    This does not apply to every product, but a great many of them it does.

    This is just another driver of Globalisation.
    Being able to buy in finished goods, means anyone can be a Director.

    They do not have to understand the manufacturing process in any detail, or have any particular skills of their own.

    Makes you think.

  • Comment number 57.

    There seems little doubt that a further cut in interest rates will be no better than flogging a dead horse. The banks have seen what happens when the Government decides to behave like Henry the Eigth and simply take over assets . The share-holders in remaining banks have seen other bank shareholders tipped into the drains and they are quick learners. If the government behaves like a tyrrant it will be treated as such. The banks will pay lip-service to listening to it but will sneak out of the room just as quick as they can and see if they can't put some more bolts and locks on their shaky doors.
    How to restore the situation ? Treat people fairly. Do not steal, just because you can.

  • Comment number 58.

    Any change in itnerest rates today is merely a re-arrangement of the deck chairs. It will do nothing.

    The banks' profit margins are being squeezed and they need to generate income at a level greater than the 12% that they are due to pay the Government.

    There has been widespread dismay that the Banks have received assistance from the Government, but not passed this onto customers and businesses that need help.

    A focussed and cost-effective boost could be given by the Banks settling the Bank Charges claims. They would save everybody a lot of legal fees on a case they must inevitably lose. They would be refunding customers and businesses that most need their assistance, since they obviously have cash flow problems to have items unpaid. The refunds could then primarily be used to reduce overdrafts and loans first and any remainder can then be used by the clients. So a boost would be given to businesses and customers, without them needing to increase their borrowing. Indeed, it would substantially reduce outstanding borrowing. The money would not even leave the banks. In many cases, it would reduce borrowing that they had already written off or were struggling to have repaid.

    In the words of Delboy “You know it makes sense.”

  • Comment number 59.

    #35 Interesting. Gold companies are trying to push a return to the gold standard in their own interest. There was a letter on similar lines in the FT last Saturday, from Peter Munk of Barrick Gold Corp of Toronto. As Mandy Rice-Davies observed: "he would say that, wouldn't he?"

    Truth is though, the gold standard never worked - and never prevented financial crises. It just meant that those who possessed the limited quantity of gold available did well at the expense of everyone else. Read Galbraith: "Money, Whence it Came, Where it Went". for a good history.

    The only true backing for a currency, gold or no gold, is the value of useful goods and services available in a particular economy.

  • Comment number 60.

    So pensioners and savers are in effect being forced to pay for the greedy bankers' and greedy PLC directors' bonuses!! This is ultimately what is now happening and it is disgusting.

  • Comment number 61.

    A better, more thought through effort from Robert today, although I think Tom Stevenson puts it better in a remarkably similar piece in the Telegraph.

    So far silent on the very good Sainsburys results and the news that they plan to create 4,000 new jobs. (Not to mention the even better results from Peacocks and its plans to open 50 new stores). No doubt still thinking of negative ways to spin those. (And if he tries to claim that bottles of port, brandy butter and 12lb turkeys are not discretionary spend I will throttle thim, in a cyberspace way).

    Anyway, back to the point. I agree that 2% is far enough and all policy efforts should be directed at reducing borrowing costs (LIBOR) whilst preserving returns for savers. Perhaps Gordon is warming us up for a two year public gilt auction by ensuring that returns elsewhere are so miniscule as to make gilts at c4% very attractive. (I for one will be a buyer if interest rates go lower). I can see a "Sid" type advertising campaign for gilts coming on. Seriously.

    As Tom Stevenson points out, the risk on house prices is now that they over-correct on the downside (which means another over-correction on the upside in due course). So I would support a government deposit guarantee scheme for first-time buyers that would help bridge the 25% deposit gap which is so far keeoing first-time buyers out of the market. Only for repayment mortgages, of course, so the guarantee amortises quite quickly.

  • Comment number 62.

    #21 Sorry to disagree: Britain's main problem now is that we are too reliant on imports for our basic needs.

    Tying up "wealth" in housing will not solve this problem, au contraire, it is part of the cause of it.

  • Comment number 63.

    As a saver I feel penalised for saving. I have always spent within my means and saved as much as I could. I never owned a credit card or borrowed more than I could afford to pay off. Yet now the return on my savings is being cut to pay for those who borrowed to much at a time when it was clear that the bubble could not last. Why should I pay for the banks and the governments mess up? Interest rates should go up to at least 5% and stay there!

  • Comment number 64.

    Of course the bank rate matters.
    It matters to retail savers
    It matters to retail borrowers
    It influences LIBOR rates
    It influences the cost of money to business
    It matters to the banks

    Over the last year Libor peaked at over 6%. This would have been the cost of raising money in the markets.

    If, as a bank, you needed to refinance loans that were used to fund mortgages fixed for three or five years at lower rates than these you'd have been making a loss

    If, you had an american ARM mortgage that came to the end of its low fixed rate period, the reset of interest rates would have been LIBOR +, leading in some cases to doubling of interest rates

    If you were a corporate borrower your interest payments might have been tied to LIBOR with higher charges

    Three month LIBOR is now under 3%

    Unfortunately some of our banks and banks worldwide made loans to corporations, investment vehicles and individual speculators on the basis of the value of assets that have now tanked so to be frank, reducing interest rates isn't going to make much difference to those needing to repay or refinance loans. The collateral just isn't there.




  • Comment number 65.

    What does it do to the securitised loans (corporate and home loans)?


    The rate of return on them also falls.
    Hence the investor will liquidate them even futher.

    And we will fall more in the rut.

    Serendepity.

  • Comment number 66.

    53.
    I'm sorry, "indbred greed" it is not, common sense it is. The shareholders have been shafted enough, restoring profitability and confidence is the only rational and sane thing for the banks to do, until and unless the government tries to force them to do otherwise.

    The base rate is not the banks' funding rate, it is LIBOR and the cost of servicing deposits. It would be insane for them to reduce their lending rates in line with base rates, without commensurate movement in LIBOR and deposit rates. (And we can all see how popular lower savings rates are!).

  • Comment number 67.

    45:

    I'm sure the Shareholders of Northern Rock , Bradford and Bingley and Alliance and Leicester would not feel that they have been Bailed out, or in fact that they have been helped in any way shape or form by the Gov't actions.

    In fact the Shareholders in the first two have lost every penny, and the last about threequarters of their investments.

    The majority of their Shareholders were of the small variety with the largest holdings of Shares being held by Pension Funds and Insurance Companies.

    None of whom were black hearted villains, just ordinary people or those representing their interests.

  • Comment number 68.

    IO have no doubt rates will come down 1% or more in a bid to be seen to do something.

    I also think the bond failures in Europe hark for bad news for our government and that may well force rates up much sooner than many analysts are saying.

    The government are leading us to penury, for those that did not see the real story behind all the 'activity.'

  • Comment number 69.

    to add to #64 and the problem is no one has any confidence in how much the collateral will be worth in a year, two years etc time so even if it is there it is being downgraded even further.

  • Comment number 70.

    For some reason I have no confidence in Brown being capable of fixing what he has created.

    We seem to going along the same path that Mugabe walked, no doubt with the same results.

  • Comment number 71.

    Post 42 that is exactly why I am overpaying.

    To be honest pretty much everybody I know is doing the same. None of us are spending the "saving".

    We all are astute enough to know that sooner or later someone, and that generally means the UK taxpayer, is going to have to pay for all the government bail outs and borrowing. We will really need the extra money then.

    As you say every pound extra paid off the capital now is greatly rewarded in the future.

  • Comment number 72.

    Re 63

    Do not worry. Borrowing is so high that interest rates will soon rise. They will probably get up to about 7% to 10% within 2 years (although inflation will rise too).

    Meanwhile we shall have a short period of deflation - perversely *net* interest rates (i.e. interest rates net of inflation) will then also be high, even though interest rates may be zero.

  • Comment number 73.

    Differential interest rates matter. Not that long ago Japanese rates were 1%, US rates about 4% and European rates were over 5%. A flood of capital washed to europe. There were better returns to be made. Now, with interest rates closer to parity, there is no need for capital to flow here. In fact because value was seen to reduce, capital flowed into US Tbills and Tnotes because these are seen as the safest form of repository. Thus sterling deflates as investors buy safe dollar investments and foreign investors in sterling funds sell further because they see their investment decline by about 25%.

    So do interest rates matter. Yes. They are about one of the few vertical things left in a flat world

  • Comment number 74.

    #52
    I completely agree with you.

    The housing market is the key to this because housing costs are not included in inflation figures. Inflation is the economic compass and it has been manipulated to cause the last ten years of "boom".
    Can anyone answer why housing costs were not included in inflation figures? and don't say because the US did not include them. I think the US did not incluse them because they knew it would create an asset bubble which they wanted...Why else do they spend the most per capita on defense...so that they can go bust without the threat of an attack.
    We all need to look at the bigger picture and not get bogged down in the details of VAT etc. Look at the causes, not the symptoms..

  • Comment number 75.

    Evan Davis is the BBC Economics Editor who told us for years what a brilliant job Brown was doing-I wouldn't take too much notice of anything he says.

  • Comment number 76.

    Surely the threat of the BoE printing billions of new notes to pay off debt and therefore, increase inflation figure would get the banks to get rid of cash as quickly as possible, wouldn't it?

  • Comment number 77.

    There's another aspect, folks: if the only place to go is upwards, why go downwards now? Oscar Wilde rightly commented that a cynic knows the price of everything and the value of nothng, one might rephrase today's Blog as evidence that a hypocrite fixes the price of everything at the risk of his skin. It's a ridiculous circumstance when supply and demand have broken down so significantly that whilst the risk of lending has gone up, the rewards for it are going down, and investors are likely to start pulling the plug now, regardless of what the Chancellor says - in a word, by not understanding diddly-squat about what he's about, he's fiddled while London burns and we're about to hit the wall.
    It's even worse than that, because the Wall is now moving towards the Chancellor: one supposes he's now dressed in a natty silver swimsuit, because far from hitting it, it's about to hit him and unless he's positioned right, he's going to end up in the drink within a month. There's only one place to go from the last-chance saloon, harp lessons start tomorrow.
    The melody to learn is "Da mihi manum", as you'll be needing one soonest to nationalise the banks, fire the executives, and send the foreign folks off to Frankfurt. The Serious Fraud Office is going to be working overtime, now it's already started in on Madoff - it should be asking itself who else was part of that conspiracy.

  • Comment number 78.

    Thuis is becoming surreal. Interest rates take 12-18 months to have any effect, even where they are passed on to the customer, naturally the recent cuts have not yet had any impact, everyone agrees that they can't go much further anyway, most agree that we have had too much borrowing already, the banks can't lend more because they lack the capital. The way forward must be quantitative easing, to get more cash in the economy (and, by buying up gilts, transfer the Government's debt to the BoE where it will be little more han an accounting entry) , accompanied by higher interest rates to moderate the future inflation, encourage savings (and bank deposits) and help banks make more profit to rebuild their balance sheets. This seems so simple and obvious I must be missing something, or do we really have to proceed in the present linear fashion until it is clear beyond the slightest doubt that it is not working?

  • Comment number 79.

    If you and the government believe that interest rates are a blunt instrument, I can also guarantee that Gordon Brown will not increase interest rates to control the resulting inflation from printed money whilst the economy is still in depression.

    The coming of hyperinflation will not be from a booming economy, but from printed money Mugabe Zanu Labour style to pay for his public sector cronies, plus from higher import costs and shortages of affordable goods.

    Infation destroys wealth and savings, and the banks will have no money on deposit to lend other that that provided by government loans themselves via borrowed money from treasury bonds since the taxpayer already cannot fund this amount of money.

    Thanks to Labour who socially engineered the majority electorate to be dependent on public sector jobs and state benefits, these indebted people will carry on voting for Gordon Brown till we all starve. Next comes elected Communism.

  • Comment number 80.

    Some (off the wall) alternatives:

    a) Spike interest rates UP a few percent and invite massive Overseas investment especially from the Middle East states. More cash in UK PLC means less pressure on UK taxpayers, more for lenders and savers. Normality and global trading resumed.

    b) Redeem every UK residents mortage debt. Just wipe the slate clean and start again. Wouldn't cost much more than spending so far. Would stop homeless, dole payouts for mortgages and enforced bankruptcies freeing up HM Courts to act against real Financial frauds.

    c) Take all countries off of the Terror List (Axis of Evil) and those with Sanctions against them and start trading freely with them. We can sell them M&S foods, organic vegetables and meat products. In return we get their cash and they can't spend it on weapons for terrorism.

    No?

    Ok. Cut interest rates to zero and we can all be broke and unemployed for years to come.

  • Comment number 81.

    A boost would be given if the BoE and Billy Bunter worked with the Government rather than against it.

    I sometimes think the government and the banks in their criticism of the MPC's extremely poor judgement, have upset Billy Bunter, and some on the MPC, like schoolboys, are doing all they can to damage its plans irrespective of the damage done to the country.

    To reduce interest rates further as you explain would be of little if any benefit and could be very counter-productive.

    Perhaps the Government ought to take the BoE under its control as suggested by various politicians such as Cable, remove King (after all he has presided over the first run on a british bank in 160 years and potentially the lowest base rate in over three hundred years whilst promoting high interest rates just a few months ago), and ensure we have a coordinated approach, both in what is done and what is said, the latter being particularly important to restore confidence, as recent comments by the BoE for example about nationalisation can do immense damage and become self-fulfilling, by further destroying investor confidence.

    It is good to see that the government speaks against full nationalisation, which would be disastrous in terms of international and domestic investor confidence in the UK, and has slapped Bean and co down.

  • Comment number 82.

    Another day.
    Same problems
    same mistakes
    same bloggers giving there own personal solutions that also havent changed.

    Yah Boo, Tax the rich sack the bankers call an election cable knows what to do darling is a stool pidgeon osbourne is a light weight. I'm doing this were all doing that you should all do the other.
    Its all just hot air.
    Money and posessions are the myth, what can you take with you?

  • Comment number 83.

    The Government needs to find a way to By- Pass the Banks to inject loans into the Small Business Sector.

    All small business pay VAT - many are cash accounting - ie they pay when paid.

    The government could easily offer this sector the chance to defer VAT Payments for - 3/6/9 months thereby allowing Businesses to Borrow directly from the Government.

    It would certainly ease our Cash Flow.

  • Comment number 84.


    #35 Thankyou for the Thorsten Polleit/von Mises reference.

    #41 You say:
    "A ten or twenty percent rise across the Public sector would restore demand in the economy and feed through ... to higher employment in the private sector and more jobs ... but for Britain to become competitive enough internationally ... the Pound would have to be closer to one half a Euro and One Dollar or Salaries would have to halve in the private sector."

    Please, supercalmdown, read mark and learn from the reference posted by #35 and save my blood pressure.

  • Comment number 85.

    Of course what the government is panicing about is that the credit boom i.e. the silly living on borrowed money giving the appearance of a grwoing economy, is over.

    To maintain the fiction people would have to borrow an additional £11 billion just to maintain 2007 spending - instead the banks aren't lending the money and in fact customers are repaying £11 billion.

    At one go the 'boom' is over - GDP is falling by £22 billlion - 3% and of course the government loses VAT receipts on the purchases - £3 billion.

    Hence the desperate measures to try and reflate the spending bubble.

    If the government does print money - it will go straight to the banks as people pay of loans - who will immediately buy government gilts and bonds to improve their solvency/ capital tier 1 assets - in other words the money wont't get into the retail economy - it just goes back to the government.

    The plan of quantitative easing/ dropping money from helicopters will, of course make the attempt by the government to raise money in April by selling Gilts - £128+ billion that much more likely to fail - who would want to buy assets in a devaluing currency.

    And if you want to know - the IMF has funds of about £150 billion available - so a serious failure by the government of the UK would just about wipe out the IMF (why else do you think GB was pleasding with countries to give money to the IMF last year?)

  • Comment number 86.

    #22 NewsSpotz

    Hopefully these aren't the 'very complex calculations' they've been using to get us into this mess.... maybe a little 'personal judgement' wouldn't have been so bad

    #28 the1beard – I smell a man on a Tracker......

    'The lower rates will still have a big impact on borrowers who have tracker loans and this is a massive stimulus to the economy and to the taxman.'

    ..... and it is offset by the big impact on savers who are now not stimulating the economy or benefiting the taxman! Or are HM Gov hoping savers will continue to spend by withdrawing their savings? - as opposed to the guy on breakfast news this morning who was 500GBP up on the rate cuts and was deciding whether to save or spend! The issue here is the arbitrary way in which people on tracker mortgages have been rewarded, regardless of their ability to pay – without Gov intervention and the contrived reduction in the base rate a Tracker would be suffering as the Bank of England push up base rates to cap inflation......

    Like I sad in earlier posts – I get the distinct impression all this money is being spent in the hope that we’ll go out and buy more T-shirts, shoes and TV’s........ Not great building blocks........ I’d put my hand up for Harder Times now but better for the next generation..... I think that was the approach we took as a country in 1914 & 1939.....

    Is Thatcher really too ‘Dotty’ to take over again?

  • Comment number 87.

    It matters because it enhances or detracts from the view of how well we are doing as a country. It will not help us from that viewpoint. For savers it has an immediate impact as the lower rates are always passed on with great speed! For borrowers the lower rates are a lot slower to come through, and this will get worse as lenders have to ensure they have the funds coming in and it is getting more difficult to attract new deposits. If we could all get 12% like the goverment are achieving with their recapitalisation of the banks then they would have no trouble getting depositers! How the government then expects the banksand building societies to lend near the base rate is incomprehensible, but then they are the KNOW NOTHING PARTY.

  • Comment number 88.

    @73
    Yes, Mrs Bloggs13c2, differential interest rates matter, but not when nobody knows what inflation or deflation really is, and when it'll make no difference whatsoever to the outcome. Differential interest rates are the true return after inflation, but when the market's broken, such that spreads have become pointless, you've no way of knowing what risk is - and at that point, we have nuclear meltdown.
    The other way of hedging might be to swap out into another currency, fully covered, and cap it with a US option - of course, the risk is that is that the bank may not be there to unswap it at the end, whence the cap insurance... it's a hell of a premium cost and you still need to place the money elsewhere. I'm away from the FX markets, what are the forward points doing against the Euro?

  • Comment number 89.

    What I find interesting (frightening?) is how unstable markets have become. We saw this in 2008 with oil going from 60 USD/barrel to 150 then down to 30, shipping rates collapsing by 90% and once hugely profitable US investment banks collapsing back in October. I think the lesson for 2009 and beyond is that there will be further huge shocks and that noone knows what they will be.

    Do Brown/Darling/King really believe that the turmoil can all be fixed by a 1% drop in interest rates or by printing a little extra money? I rather doubt it, but then I see much more hubris than humility.

    So what do they do if there's a serious gilts strike, or if Sterling collapses (or conversely appreciates to an unsustainable level), or if there's another run on a British bank, or if a major foreign bank that takes UK deposits collapses, or if there is a further wave of corporate bankruptcies in marginal constituencies, or if food prices spike in the next bubble?

    I really wish they would do nothing and wait for events. Since none of them are really in control of events, why pretend that they are?

  • Comment number 90.

    Here's a very quick and simple idea.

    Tie the bonus levels of all staff to their company share price, with all bonuses to be repaid in the event that they leave the organisation, or that the organisation goes into administration (or receives government assistance) within the next 5 years. Similarly, senior management salaries could be baselined at the start of each financial year, and then adjusted by the net increase or decrease in the share price over that period. For politicians, salaries could be tied to a combination of FTSE level and an exchange rate basket of currencies.

    This would have the happy effect of reducing the salaries of some of these greedy individuals by 80 or 90% (or even more in some cases). And it might even get them to start thinking longer term, and to think in terms of the interests of their company or country, rather than their own pockets.

    Finally, the only way we are going to get a lasting solution to the current mess is when people start spending only the money they actually have, or can genuinely afford to borrow (i.e. the level of debt can be covered by existing assets by a factor of, I would suggest, at least 3 times). Yes, this will mean lower standards of living than are currently enjoyed by almost all for a few years, but as has been noted here already, many of these excesses have to now been funded by fantasy money.

    Painful, but it will put us back on an even keel.

  • Comment number 91.

    #5 is looking for a bank with REAL reseves able to lend REAL cash to people.

    Tesco.

  • Comment number 92.

    Does anyone actually believe that the government & BoE interventions will make any difference to where we are headed? We are after all a capitalist society and in such a society the market decides what happens and as everyone knows - you cannot buck the market.

    There is a massive readjustment going on which will last for some 2 - 3 years at which point we will slowly begin to recover, the markets will start to take off again and all the lessons learned previously will be forgotten! Collective amnesia is the driver of these cycles!

  • Comment number 93.

    So now there is further leaks of potential rate drops, which will have no impact whatsoever.
    Lets see what is happening, borrowing, spending and saving. As individuals we are being encouraged to do the latter, not by GB but by the Tories.
    The govt seems to be only intent on borrowing so it can spend its way out of the mess it has partly created.
    I seem to remember that Obama said the same thing shortly after his election victory, with one exception, he also said lets save money on reducing expenditure on areas where political or other minority pressure groups has been brought to bear.
    In the UK lets save money on cutting the number of Quangos and other such minority groups.
    If we, as individuals, have to save to ensure we withstand the future financial pressures, then the government under GB's leadership, should do the same.

  • Comment number 94.

    The great joy of the internet is that any old mrs bloggs can, now, if she chooses root away and look at annual reports, the government's blue book, newspaper articles from august journals across the globe and within relatively short time spans discover that most of the 24 hour news is shallow regurgitation of press releases and personal opinion. The facts often paint a very different story

  • Comment number 95.


    Does anybody else have the feeling that we are getting into Car Boot sale territory with the interest rate - looks cheap but on offer because it doesnt work properly anymore?

  • Comment number 96.

    Perhaps tighter regulation needs to be applied to any PLC's in future.

    Regulation to limit just how much Debt they can have in relation to their assets.

    This would help prevent Private Equity from buying up a PLC, asset stripping it, loading it with debt and then selling it on to the Public including our Pension Funds.

    It would lead to a Private Sector with more resilience to slumps and downturns.

    ( I would not apply such rules to private limited companies, just those Publicly listed)

  • Comment number 97.

    Cutting interest rates is totally pointless. When this whole crisis started they should have been immediately cut to 3 - 4 percent, but they dithered and cutting below that has now become totally pointless. Lenders will never in a million years pass on the rate cuts, and they've told people that, savers are always the first to be hit by a rate cut and it merely devalues the currency even further.

    On top of that, we now have the same high levels of government spending, financed by borrowing because tax revenues are going down, which will snowball the effect still further in a few years as our taxes do nothing but pay the interest. Even that kind of advice is available from debt counsellors.

    Are central banks, governments and economists that far out of touch with what is happening?

  • Comment number 98.

    52. U9461192
    46 sashaclarkson

    spot on, couldn't agree more.

    16. joeplumber
    "If the government paid off all our personal debt, bank loans, credit cards, mortgages, etc.
    The banks would have lots of money to lend and being debt free we could all set the bubble off again.

    Of course next time time round all the prudent savers could join in as well. Obviously we could only buy things produced in this country as the pound would be worthless abroad, but hey if the word secretly got around beforehand we could stock pile loads of stuff in advance.

    There is always a KISS solution somewhere"

    Absolutely brilliant, I apologise that I actually took you at face value for a complete thicko when I first read it but I now I understand. Better keep it VERY simple in case someone overseas finds out before we start hoarding!

  • Comment number 99.

    Probably burried but his is my 2 pennies worth:

    Reducing interest rates will:
    Make savers look at alternative assets to bank savings (property, stocks) which will benefit the economy reversing some of the 'flight to cash' resulting from falling asset prices

    Benefit some borrowers (those with tracker rates without collars) by a considerable monthly sum, some of which will be spent. This will be offset by a reduction in spending by net savers but possibly this second group will be forced to run down their capital as they will not have the option to cut back.

    Yes the reduction in interest rate spreads will harm the banks profitability but the government has conculded that it can support banks capital base directly so this is not the key problem.

  • Comment number 100.

    Not passing on the reduction in full to borrowers makes a mockery of the whole system! Wait until they start going up:

    BoE reduces by 1% - Bank reduces by 0.25%

    BoE reduces by a further 1% - Bank reduces by 0.25%

    BoE increases by 0.5% - Bank increases by full 0.5%

    BoE overall rate is 1.5% lower - Bank's is right back wher it started (so effectively 1.5% HIGHER). Disgraceful!

    What is also a disgrace is the way Robert is allowing himself to be used by Labour to explain away what is essentially the failure of the Government to force these banks to reduce rates - Even when the taxpayer owns a majority stake! Is Gordon really THAT powerless?

 

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