Who benefits from rate cut?
I've just had a call from an astonished individual who has several hundred million pounds that he puts on deposit in various banks.
As of 10 minutes ago, a leading British bank was offering to pay him almost 7% interest for his cash.
That was after the Bank of England's policy rate had been slashed by 1.5 percentage points to 3% - an unprecedented reduction in the history of the Bank's Monetary Policy Committee.
Why does it matter that this holder of squillions is still being offered almost 7%?
Well, if he's being paid almost 7%, what chance is there that small businesses will be able to borrow at less than 10, 12, 14% or more (with the actual rate depending on an assessment of their credit-worthiness)?
Those who most need a substantial cut in the interest they pay - hard-pressed businesses, cash-strapped households - are unlikely to enjoy more than a small reduction.
As I described in my note on Sunday ("Why interest rates are not falling") the transmission mechanism from the Bank of England's policy rate to the interest rates we pay has broken down.
Lenders have - understandably - concluded that the risk of lending has risen very sharply, and are therefore demanding much greater rewards for providing credit.
So at a time when all the indications are that we are in a fairly severe recession, and many companies and individuals are struggling to keep afloat, it's a serious worry that even the kind of evasive action attempted today by the Bank of England may provide only modest succour.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~55~RS~)
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I'm confused. Why would a bank pay your friend 7% to borrow his squillions, when, as I understand it, they can borrow squillions from the Bank of England for 3%? What have I missed?
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This rate cut is like farting at thunder
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It is absolutely UNACCEPTABLE that, again, it is only the greedy banks that will reap the benefits of state intervention, while poor consumers are left to suffer.
The govermnment should FORCE the banks to pass on the cut. How can they be allowed to both have their cake (survive with cash infusions) AND eat it (cheap borrowing for them and bigger profits to come)???
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Would Robert care to pass on which bank is offering 7% interest - and how many hundreds of millions would I need to qualify?
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I was wondering if there would be a post today! Lowest rate since 1955... Wow! Unfortunately I'm a saver, but still...
Does this breakdown between the BoE and the High St rates not show the BoE has no teeth. Could the government not force the cut to be passed on?
Is your slant not to "shame" the banks into doing it (and helping the government achieve this), because they don't have the power?
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For those of us with a mortgage that tracks the Bank of England Base Rate we are fine.
The fact that many banks haven't passed on even some of the last rate cut i terrible and I'm sure some won't even reduce their SVR's by even 1% of the latest 1.5% rate cut.
It is perhaps time for the government or the OFT to investigate mortgages as well as bank overdraft charges.
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Who sets the LIBOR rate? I know, the Banks, but WHO in the banking world actually sets this rate which is holding our country's economy to ransom? Can someone please enlighten me? Thanks
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Given that Gordon Brown is insisting banks pass on the interest rate cuts to lenders, it will be interesting to see if the government owned Northern Rock take the lead in doing so.
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We must not be under any illusion, the Government will benefit; it intends return us all back to the robust and well-managed economy that we all knew and loved pre-credit crunch.
Here's a quote to underpin my assertion:
"[GB] said the UK problem was not shortage of demand for homes at "the right prices" but a shortage of mortgages "at the right prices for people to buy"."
http://news.bbc.co.uk/1/hi/uk_politics/7667284.stm
This can be coupled this with Gordon Brown's vision of returning the economy back to 2007 lending levels, and articles detailing how house prices will have recovered by 2013.
http://news.bbc.co.uk/1/hi/business/7692814.stm
So unless the average wage is about to explode to £58K p.a., any talk about regulation and reform of the lending market is just spin. The Government has bought into the lending market in a very big way, and it has a significant interest in keeping house prices propped up so we all feel rich and start spending.
We are back on the road to 125% mortgages and mortgages at x6 of your income.
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Hats off to the BoE, better late than never.
It won't be a salve for ills but it will certainly help.
I hope and expect that they will shave another ½-1% at the next MEPC meeting, which is on the 4th Dec.
Some people have mentioned that it did not save Japan (when they cut rates to zero for a long period) which is true in a narrow sense. However I reckon it would have been much worse without the superlow rate regime.
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How quickly will my savings rate be cut by 1.5pc while the mortgage rate is reduced by 0.5pc?
The banks need to pass on the whole cut, to both lenders and borrowers equally. Otherwise we should demand our money back!
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"Well if he's being paid almost 7%, what chance is there that small businesses will be able to borrow at less than 10, 12, 14% or more (with the actual rate depending on an assessment of their credit-worthiness)"
Well lets hope so!!! Until all the businesses and all the individuals that have overburdened (including the Banks) go to wall and we can start again a fresh with real cash this problem will not going away.
The BoE can cut interest rates as much as they likes, but if the Banks aint goin to lend it is irrelevent.
Lloyds might have promised to cut its rate immediately, but unless you have a massive deposit and a +AAA rating, you aint gonna get a mortgage off them.
What a complete waste of time.
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The Bank of England cannot stimulate the
Economy like this as the Banks themselves will be unwilling to pass on their interests rate cuts to the lenders, the gap between lending out 10%+ and acquiring funds (LIbor) is simply widening as risk is still prevalent.
Several thinkgs need to happen
1 Interbank lending (LIBOR) rates need to move nearer to Base rate with the GIVT guranteeing Interbank lending, I do not see the rationale for such a wide discrepancy
2 Banks should be 'persuaded' to pass on the Interets rate reduction
3 Banks should also be encouraged to lengthn the loan repayment profiles on ther book to ease the cash flow burdens, oif they are saying that rates to borrowers will remain high because of the risk, then they should ease the TOTAL repayment from their customer by lengthening the term.
We should all realise that it will take Banks years to get out of this mess, short term thinking and grabbing interest rate opportunities out of the Economy's misfortune seems to me the same short term thinking that got us into this mess in the first place.
If Banks continue to be this greedy and are suddenly more 'risk averse' then they were 18 months ago, then they should head for the total comfort zone of 100% nationalisation and lets have a macro level solution and consistent behaviour towards this issue.
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Great !
What about the savers for crying out loud.
Im very tempted to I just blow the lot and just borrow to the hilt then default and just add to the debt mountain...
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As a saver, I am very glad that banks may not pass on all of this cut.
Could someone explain just who does pay the official central bank interest rate? And what happens to the interest payments? (And why can't we all borrow from the central bank?)
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Not convincing this I am afraid, I expect by the end of this day; many lenders will be advising of rate cuts.
Your friend may well be offered 7% and if the banks are lending that out as credit card debt for 20% its good profit. You are confusing this one lender for this one deal with this one person with squillions.
The banks can get cash much cheaper cash than 7% well in excess of your friends squllions, from normal depositors, and you know it. As the first respondent said ''am I missing something?''.
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As one economist said recently, "It wasn't high interest rates that got us into this mess, so what is the point of lowering a low interest rate?". There aren't any solid precedents which indicate that this rate cut will improve the situation, and it seems unlikely that the cash-strapped banks will want to collect less revenue from the loans on their books by reflecting this reduction in the price of their mortgages. I am certain that not one institution will want to reward the savers who help to shore up their balance sheets by retaining an attractive savings rate so, as Robert says, who exactly does this rate cut benefit? The boom situation we were in directly before the Credit Crunch will never return under current financial systems and rules, so why try to get banks lending at excessive levels all over again?
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Shouldn't the government show the banks how its done and pass on this BOE rate cut by reducing the rate on the new RBS, HBOS and LTSB preference shares to 10.5 percent?
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Cutting rates by 1.5% in one go smacks of panic - it could be more problematic than it is worth. I think they should have cut by 1% today with more to follow...
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yet again the rich get richer and the poor suffer even longer.
oh those poor banks needing handouts from other sources for years they have had every thing there way charging what they like and making large proffits that went to pay huge bonuses and other extras no thought of the future becouse there is always a way of making money.
they have helped themselves to the cookie jar too often and now they are squirming becouse hard times hit, greed is no excuse for bad over paid management.
so the old lady of thread needle street has cut the rate but the public will be lucky if they see any of it no general banks will keep there higher interest rates to squeeze more money out of mortages and loans.
so the rate reduction will only help the rich.
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The people who will fund this interest rate cut are the retail savers as this will allow the banks a further opportunity to cut the rate they pay to depositors whilst still keeping their margins high when lending out. Is this just designed to help the banks rebuild their balance sheets?
This sort of decision always makes me wonder what is in the minds of the regulators. Are they just making a statement? if so, why and what do they mean?
This will as you say have a very marginal rate on the flow of credit in the economy. It already has debased sterling in the international money markets and, no doubt, will be used again as a reason to sell the pound short as the required result fails to follow through.
I agree with your comment that this will only provide modest succour. Perhaps you should reshape the use of the word `succour'.
The average citizen is being suckered. We are having to support the banks from our taxes and support the economy from our savings. What happens when we lose our jobs?
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Was this post written by Robert Palin??
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Typical- reduce the base rate- let the banks cream off more money to put their books straight- the customer still pays the same -presumably till the pips squeak-and are financing the bail out of the banks with their own taxpayers money- ever feel as if you have just been screwed.
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Can I have your phone number Robert,
I have several hundred millions I need to deposit.
GC
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1. Does this all mean that the Bank of England has lost control of interest rates?
2. With the Prime Minister touting a likely cut and Peter Mandleson pressuring banks to pass on the rate cut before it happened, show that the Bank of England is no longer independent? If that is the case should we plebes not be told??
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This supposed rate cut is timed to try to boost Christmas sales and help companies turn massive stocks into cash.
Hoping consumers will be kidded into thinking things are improving and they will once again have lots of cheap money to spend.
After Christmas many will be thrown out of their jobs as the flow of money to spend has dried up.
Not so much a matter of confidence.
Just a cruel confidence trick.
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Robert, surely you have missed the point.? Those personal borrowers with deals linked to base rate i.e. tracker mortgages or businesses with their business loans base rate linked will feel the effects. Only those crazy enough to be wanting to borrow new money or re-negotiate their existing deals will see very little difference from this morning. Surely the vast majority of people are not looking to borrow new money and with such a small percentage of borrowers sat on lenders SVR's, this will have a hige effect. I have had numerous calls from friends who have worked out how much better off they are a month and already working out where they can spend it - so it looks like the BOE's plans are workng, we will all be spending our gains! What will be interesting is how much those banks who went cap in hand to the BOE for the bail (hand) outs reduce their SVR's!
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As a saver, this could be disastrous!
Surely the large amount of people saving and acting responsibly with their money should not have to pay the price here by a substantially reduced income?
What are the incentives to save any more?
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The banks' first committment must be to those whose money they hold as deposits. If they don't pay a decent rate to the depositors, they won't have any money to lend. Why should they lend cheaply, they are in business to make profits , not to risk their depositors' savings dishing out cheap loans to dodgy businesses or overstretched mortgage holders who have taken loans they cant service. As for the government shifting the blame for the lack of lending to the banks, their policies of unbridled borrowing and low interest rates caused the problem, and their high tax regime is locking the economy into recession. The lowering of interest rates is effectively a devaluation of the pound which will lead to higher domestic fuel costs,and higher transport costs which in turn leads to an increase in the price of all commodities. Artificial attempts to control supply and demand do not work, and will cause even more problems.
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It may be that the main advantage of this to the Government is to cut the cost of Government debt by dropping interest rates at NS and I - they at least have got to follow the BoE rate down.
Those who have shunned the banks by looking for the safer haven of NS&I will now have to face the risk in the banks or get almost no return on their savings, so in that respect it might be good news for the banks.
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It may be that the main advantage of this to the Government is to cut the cost of Government debt by dropping interest rates at NS and I - they at least have got to follow the BoE rate down.
Those who have shunned the banks by looking for the safer haven of NS and I will now have to face the risk in the banks or get almost no return on their savings, so in that respect it might be good news for the banks.
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There's something not right here. The line we're hearing from the government is that it's good that there is a huge rate cut so that us ordinary folk will actually see some rate cut, which we wouldn't see at all if there were just a small rate cut.
So in other words, they are expecting the banks to rip us off, and only to pass on a tiny fraction of the rate cut.
Wouldn't it be better if we had some sort of system of regulating the banks (I'm sure this was talked about once upon a time)? Then they could be made to pass on rate cuts. Or would that be too much interfering with the cherished "free market" that has served us so well in recent years?
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So far as I can see, the only people to benefit from this rate cate are the irresponsible borrowers who contributed to the problem in the first place.
There's absolutely nothing in it for anybody who's been prudent...
Its a completely ricadoolious way of running the economy.
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So will the loss making Housebuilders be Nationalized ?
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Despite being heavily in debt, this rate cut is highly unlikely to affect me.
Our mortgage was re-fixed at approximately 6.5% for five years back in July.
We also have a secured loan on our house, with a High Street bank, and it seems that everytime the interest rates have dropped, our loan has gone up due to "current market conditions". I believe the current rate is around 10%. No wonder my bank is one of the few not to need government assistance.
I don't think the rate cut will kick-start the housing market as buyers will now be holding out for new, better deals from the banks.
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Was it Nat Rothschild???
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By the end of 2009, you will have to pay the bank to save with them, while the bank will pay you to take a loan.
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Abbey owned by struggling Santander, has raised its mortgage rates to new customers !
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#9 Total Injustice
The government have bought into the mortgage market in a big way. Does this not mean that in order for them to get their (our) money back they HAVE to ensure the housing bubble doesn't deflate further?
Otherwise the "assets" they hold will reduce even further? Or do they just hand those back to the banks in return for cash, whatever the current value at the time? This would mean the government couldn't make a loss or a gain?
If they can, they need to manage the mortgage market very carefully, which is counter productive?
Could someone enlighten me?
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Can anyone tell me what effect (if any) the rate cut to 3% will have on the Libor rate. The reason I ask is that I self cert on my mortgage and my rate is governed by the Libor rate and not the bank interest rates.
Thanks
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So which big Housebuilder will be the first to go bust ?
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Amazing and shocking to see a 1.5% reduction! What other blunt tools have the government and BofE left at their disposal in an attempt to soften the expected severity (and length) of this approaching downturn? It seems that we may continue to see saving rates (for high net worth individuals or otherwise) outstrip the level of falling base rates. The signal is now the BofE believes inflation is no longer going to be a problem. So far, the post announcement GBP/USD rate is holding. What should concern us is the risk of dropping into a deflationary cycle.
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Of course Deposit account savers will lose out, House prices are still falling, real wages are still falling, (mainly due to wage restraint in the public sector), business confidence is still falling.
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Having read the first few post, I am amazed!
50% of people have fixed rate mortgages and a lot them had to renegotiate in OCTOBER. Doh!!!
For the fortunate 10% of mortgage holders on a tracker the entire economy is resting on them buying a car, fridge, more loans etc
Get a life - These cuts and all the further cuts are absolutely useless. Noboddy can borrow, nobody wants to borrow, those that NEED to borrow should be laid to rest.
We are at the point where interest rates are blunt as Alaistairs red pencil
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Calm down ... calm down
Even before the crunch, my own bank always took until the next day to pass on any interest rate cuts.
It is a bit unreasonable to jump up and down like this a mere two hours after the BoE gave them a surprise cut like this. Let us see what tomorrow brings.
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Peston - just like you to brag about your mate's with... 'Loads of Money'.... Your actions in these past months (Northern Rock & HBOS should be under investigation by the FSA.
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#3 Cash infusion ?? What cash infusion ?? So far that has been just talk. Until the "cash infusion" becomes a reality, I think the banks will be very cagey about lending to anyone without a good credit background !!
Of course, the government can "force" the nationalised banks to throw good money after bad assets. However, NR seems to be chucking customers out rather than taking on more of them !! So much for "forcing" banks !!
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A consolation for those wanting to buy a House.
Repossessions should be getting cheap as chips.......
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I wonder how many unemployed bank Clerks will face repossession ?
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Robert
I suspect your friend may be pulling your chain or your use of the word 'leading' to describe this bank is misplaced. HSBC is not paying anyone close to 7% not for a deposit account.
As a saver i am losing out today. Clearly the rate of inflation has not fallen yet and may take some considerable time to do so. My pension is down about 35% compared to last year. In the meantime after deducting 40% income tax on the gross interest my savings receive my cash is losing value quickly. Well i suppose thats Labour through and through; bleating on about social justice while building a casino economy and now having no option but to rob the hard working and truely prudent who live within their means. I never voted for them because i had not forgotton the last time they were in power and the chaos and near collapse of our proud country then.
Fortunately some justice is unstoppable and that will be the removal of this awful collection of rag, tag and bob-tail masquerading as a government and those who cannot afford their life styles without spending on credit at a level that anyone normal would describe as prodigality, will lose them.
Yvette Cooper can bark all she wants at those banks that have begun refusing to further foolish and underpriced loans, but virtually no one who matters cares a jot for views because it is not her money to waste. We are tired of her government starting wars, flooding our country with free loaders and now eroding our savings.
I wish they would just all boom and bust off.
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33 Anyone who has bought Shares, invested in a Pension plan, or just put some money on deposit ,will in the end lose out.
Inflation and low pay rises, plus loss of choice in the shops will affect everyone.
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Have you checked your Pension yet ?
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My bank (HBOS) is still offering 6.5% fixed for a year on deposits.
With the base rate at 3% now, I can theoretically get at worst a 4% tracker mortgage.
So if I could persuade someone to lend me 100 mill (unlike Robert's chum I'd sadly have to borrow it), secured against a HBOS deposit, I'd make 2.5 mill in a year and never have to work again.
Any lenders out there interested?
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Robert, Why is LIBOR so high and furthermore, why is the Bank of England not part of that 'interbank lending panel'? What is the point in having a Central Bank if it has no influence in the 'wholesale' markets? Why not just have a gigantic PINK china piggy bank in Threadneedle Street, for all and sundry to raid? PLEASE PLEASE explain WHO ARE the members of the wholesale markets? If Hedge funds can be regulated why not the WHOLESALE marketeers?
So many questions.....
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So if I'm a fiscally responsible borrower who decided to fix his mortgage rate to a level that he knew he could service, I lose out to the person who gambled on a tracker. Fair enough, it was my decision and I can live with that. I'll probably try to fix again when this deal comes to an end and with any luck it'll be at a lower rate. I don't think that, 2 years ago, anybody thought we'd be seeing this sort of variation in the interest rates coming along, but hey ho, I lose. I don't blame the banks - indeed, what would we do without them, but there appears to have been an awful lot of political pressure from the government to drop rates and I don't see the government doing anything for me apart from spending my next 30 years of tax.
Of course, I'm also a saver, but to what gain? Less interest, and I'm still taxed on that. I lose again.
But for those complaining about banks not passing on rate cuts, that's just greed on the individual's part. Unless your savings are in excess of your mortgage, any drop in your mortgage rate is a bonus and to whinge that it's not enough is to blame someone else for your own greed in choosing the house you bought and taking out that mortgage in the first place.
I may be in debt, but at least I'm prepared to live with decisions that I made of my own free will.
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No matter what the economic situation,
"The rich get richer and the poor get poorer"!
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So those who are better off will now spend more to get back into BAD debt because their mortgage payments have gone down its a "Full circle"
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How can a BoE interest cut immediately affect the banking interest rates while there is still a big taboo (with a long history) among UK banks to borrow money from the Bank of England? Recall that the run on Northern Rock started when NR decided to actually make use of their (so far theoretical) ability to directly borrow money from the BoE at the base rate. A bank actually taking money from the Bank of England is seen in the UK as a sign that this bank is in bad shape about to crumble. It is only done here as a last-resort measure.
Other question: With the UK base rate finally below the eurozone baserate, can be please now rescue our crumbling economy by joining big euroland? Aren't all of Gordon's criteria are now fullfilled?
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What we need is, not the Bank of England reducing base rate, but the Government reducing taxation. Instead of lecturing the oil and energy companies about lowering prices Gordon, just give us some of our money back (PS I'm not holding my breath).
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How much bad news have the Building Companies got up their sleeves and when will they let us all know ?
Presumably not selling any Houses means they will make a humungous loss......
With more job cuts to follow.
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It is clear that bailing out the banks has once again protected this industry at the expense of the consumers. Basically, because of the moral hazard of letting banks fold, we the UK taxpayers have to pay to get the bankers out of jail. Yet, we don't get anything out of it as they use interest rate cuts to rebuild their balance sheets at the expense of other businesses.
Why don't we stop banks from fractional reserve lending? Let's make funds available from central banks to those who have good security at the Bank of England rate.
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Oh dear-those of us who have been prudent are likely to suffer again.
Having saved and saved for that rainy day, with two children at University, an out of work husband, and no help from the State, we will see out savings income drop while those who have overstretched themselves are helped.
Bitter-you bet!
We are lucky, I suppose, that we have those savings but we had hoped they would see us through. Instead, my husband will have to draw from his Company pension 7 years early as , at the grand old age of 53, he appears to be unemployable!
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Lloyds TSB announced prior to this announcement that they would pass on any reduction to all mortgage account holders with a variable mortgage rate.
My mortgage is with HBOS (who I understand are not part of the 'LLoyds' Group yet.)
The fact that my Mortgage Company are relying upon Public Funds to support their 'predicted' merger but have yet to announce that, at the very least, it is being passed onto those with variable mortgages rate speaks volumes.
I have always had a variable mortgage and every interest rate increase has been passed on in full.
If HBOS wants the 'State' money it must tow the line and if the fail to do so, the Government must enforce it.
And, in passing, I know it's not good news for retired 'savers' and I am acutely aware (from my own close relatives) of the effect that this will have on them, however, all those retired savers still receive a basic 'State Pension' and they must remember, that those persons still in work, like myself, effectively pay for that 'basic state pension' - if this interest rate cut keeps more persons in work and thus paying contributions to the state, then it is to their benefit.
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One easy solution for the governemt to help the majority of people who need assistance....Northern Rock or B&B to offer reasonable rate mortgages (+1/2% above BOE base rate on most LTV's) therefore enabling cash strapped families to be able to re-mortgage at a reasonable cost (without inflating the housing bubble again) which will then FORCE all the major UK bank and building socities to lower their rates in order to remain competitive. As a side benefit tax payers get their money back quicker through this increase in market share of the nationalised banks. The stick is the only thing that banks will listen to. They are now and never will be again entitled to complain about 'state intervention' and 'let the market decide'. The market decided they were all lame ducks this year and without (our) tax payers money the majority of them would be be collecting their P45's.
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I too would like a simple explanation of what the base rate actually is, and who pays this rate to whom.
I had heard that it was the rate at which the Bank of England paid money to the commercial banks when they deposit money with the Bank of England.
Is this right?
Before that I thought that it was a rate at which the Commercial Banks could borrow from the Bank of England at.
I would like someone to explain to me just what it is.
Thanks.
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Banks will pass on the cut. But to savers not borrowers. Actually I have just found out that my bank slashed interest rates by 0.5 percentage point on both my saving accounts I have with them last week. I wonder what happens now. The level of inflation is already above the interest rates, and so my savings are shrinking.
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Savers shouldn't be upset. The reason the BoE is reducing rates is because the inflationary pressure has gone away. Infaltion could even be negative soon, which means the real rate of return of a 3% base rate could be quite high. It's a much better return than 5% interest during a time of 5% inflation!
And I'm delighted, because I've got a tracker mortgage and I'll be £200 a month better off.
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Who benefits from rate cut?
1. The banks - gives them a chance to build their reserves up.
2. The government - Glenrothes anyone?
The hoi-polloi won't benefit, capital depreciation has now been re-established that the bank rate is less than inflation.
Those who have scraped and saved to buy their homes and provide for a pension have been sold down the river; house values dropping like a stone and the pound being devalued to bail out the banks.
The message is clear; spend and borrow to the hilt, live off the rest of us.
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#21 "Are they just making a statement? if so, why and what do they mean?"
just an uneducated guess, but I think it means that Gormless Gordon did *NOT* get the hard cash support that he had been hoping for from the Arabs and he has to show that he is "doing something" to the voters in the coming by-election !!
In military terms, it's called a diversionary tactic !!
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I don't understand one thing. As one reader commented the banks will only lend to businesses and individuals who have a AAA+ credit rating. The same banks that WE THE UK TAXPAYER, bailed them out because they couldn't manage their own finances. What now happens TO THE UK TAXPAYER (and don't forget UK SMALL BUSINESSES who pay an extortionate amount of tax in the form of Business Rates, the biggest rip off ever) who don't have a AAA+ rating . The banks have been given a fresh start - do UK TAXPAYERS get a fresh start and have their credit histories wiped clean or do we have to continue to be penalised for years to come. PS. Does your friend with squillions want to lend me £20000!!!!!!!!! I'll pay him more interest than the banks!!!!!!!
PS. A form on business rates and what businesses get for their money would be a great point to debate.
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The banks cannot pass the whole cut on. They need to build up their capital base, reduce their leverage and pay back us the taxpayer, therefore they cannot pass the whole rate on.
Well they could, but only by bringing in significant bank charges for all transactions.
Commentators who for the past few weeks have been saying that the BoE, HMG and the banks themselves have virtually no room for manoevre, made that assumption factoring-in deep interest rate cuts because it was obvious that was going to happen.
We are, despite a 1.5% cut, in serious serious trouble.
Remember, dropping the base from 4.5 to 3 is actually a 33% cut which is staggering especially when you consider that it's not designed to stop a recession, just slow it a wee smidgen.
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I revceived nearly 10 emails from various lenders with in 30 minutes of rate cut, saying they were revamping their rates and products. They were shell shocked and spooked by the reduction and trying to make more money by taking off all their trackers and just leaving the fixed rates on their list.
NEVER TRUST A SINGLE ONE OF THEM!!
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All this talk of mortgage lenders being irresponsible in the past - but what about those who deliberately pushed the system beyond sensible (and legal limits) and helped create this financial chaos !
Oh yes, of course. I refer to Lord Mandleson of Borrowdale - who took a large secret loan to buy a house in London because the legitimate mortgage on offer (properly proportioned re his salary/outgoings and debt repayements) wasn't enough for his humble designs!
The classic sub-prime borrower, surely. No fault of the banks or building societies who clearly took his application on trust. If you can't trust the word of an MP......?
His reward for this deceipt? A seat in the Lords with a mission to help unravel the financial mess.
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Hmm...this feels familiar, here in the US.
An outgoing Republican administration, having suffered the death of a thousand cuts, a fresh-faced idealist Democrat riding in from nowhere to take over, promising everything to everyone in sight.
Money supply booming, but no one borrows, because no one trusts the future.
Auto industry on its backside, going begging to Washington.
The stock market--don't even go there, girl....
Land wars in Asia, which need winning.
It's stagflation time--it's the 1970's!
Now, where did I store all those disco records?
Thanks, again, Mr. Peston, for helping us sort it all out. Well done!
*******
As for the bank--they want cash to lend without Mother Government breathing down their neck.
This all gets better when government is trimmed way back, taxes are drastically lowered(including elimination of capital gains tax), and the auto industry decides it's in the business of selling cars to consumers, not running a welfare state for its unions.
I'm not expecting help to ride over the horizon anytime soon.
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Of course, the arbitrary and unjust nationalization of Bradford and Bingley , and Northern Rock, has shown international investors just how dodgy and untrustworthy our stock market is.
Thats partly the Govt's fault, mostly down to the foolish behaviour of hedge funds and shortsellers, in breaking their own toys.
However, the real long term investors are now boycotting the market as they can see things are not going to get any better for some considerable time to come.
Most of the foreign investors have taken their money home.
After the Banks, the Building companies, tell me I'm wrong!
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Can someone tell me how cuts in interest rates will stimulate the economy?
With an ageing population it's the over 50 babyboomers who have the discretionary spending power.
If savings rates drop I for one will defer or cancel planned spending - most of which would have been within the UK economy.
Meanwhile, either the banks don't pass on the rate cuts or they do and we see the expansion of the unsustainable debt that got us into this mess in the first place.
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Help the economy ?,my back side,this only helps the greedy banks to be even more greedy.
I wonder if this country will ever get a Labour government again cause this one sure is not.
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a)i f competion between banks is working then rates will fall is commercially viable.
Or has there been so much consolidation that this no longer works?
b) the past is the past, and if the banks are not seen to be lending prudently why should I lend them money at low interest especially if I think the government is forcing them to lend money which is not commercially prudent.
c) If the rates are not kept up how do the banks pay the government 13% for preference shares.
d) if the rates are not kept up how do the banks and building socs pay for the Icelandic money via the FSA. Mr Brown et al kindly said that their own rules didn't apply and all amounts, even over £50 k, would be paid for,in one form or another by borrowers.
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We need to remember that low interest rates do not just stimulate borrowing for consumer purchasing (including houses) -thereby stimulating demand and production. Another effect will be to remove the "cash is king" incentive for investors to go liquid. If your cash in the bank is paying low interest, the pound is falling and inflation is rising (all side effects of low interest rates) then equity investment in UK companies that can maintain substantial dividends looks good again.
Although there is much doom and gloom in productive industry they will all benefit from the same factors; -low interest rates, higher consumer demand, falling pound. Bigger worldwide operators, the oil companies and Rolls Royce etc will benefit from relatively higher US dollar.
The BOE is doing the right thing. Now those with Squillions should be re-investing and re-vitalisng the equities markets that are so important to overall economic confidence.
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The interest rate cut is great news for mortgage payers if the cut is passed on - but is dreadful for savers. But lets have a bit of reality here, house prices just got out of hand they were totally out of touch with wages and they need to drop, Negative equity is only bad if you need to move.
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To the person who asked which bank will lend money at 7%. If you go to moneysupermarket.com you will see that 3 banks are lending at 7% to 7.1%. AND you don't need squilions of money ! One of the accounts only requires a minimum of £1, one £500 and the other £1000 !!!!!!!
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#28
"As a saver, this could be disastrous!
Surely the large amount of people saving and acting responsibly with their money should not have to pay the price here by a substantially reduced income?
What are the incentives to save any more?"
I think you've kind of missed the point. We are heading into a recession; we need people to spend money. So, yes, there is less incentive to save.
GO SPEND!
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It will not make any difference. Even if they reduce intrest rates to zero. The money has gone and the only way to get it back is by either windfall taxing the passed bank bonuses or by letting many people suffer.
Money has been sucked out of the banks by the greedy bankers and has disappeared into their own pension funds. Either we get it back off them or we end recapitalising the banks ourselves through excessive intrest payments or tax. Which ever way you look at it, it boils down to quite a simplistic problem. The mony has been legally stolen and we need the government to get it back for the people.
In around 118AD, Hadrian won great popularity by cancelling massive amounts of debt. Can we learn something from this?
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Nobody seems to understand that Bank Rate is a symbol and nothing else. Lending rates depend primarily on the cost of funds. Some of the banks that are now under fire are paying the treasury 14% for their billions of bail out money. They cannot now go to the discount window and borrow at 3% to repay the billions costing 14%.
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All I can think is what amazing things could be done if this individual withdrew some of his "hundreds of millions of pounds" and distributed them to charity or medical research organisations rather than keeping it in the bank.
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Forgot to add that a lot of lending will have been fixed interest for 1/2 years so rates reductions cannot be reflected immediately?
My loans to Northern rock are at 7% with some way to run.
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The banks may say that interest rates remain high to reflect perceived risk. Even if that is true, and it is in fact more likely that they are simply profiteering/'rebuilding their capital base', the interests of the COUNTRY demand they pass on rate cuts. There is no argument against this, since they can still use tighter lending criteria. If they will not behave responsibly, the state must take powers to compel them. This is an issue of national economic survival.
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"I've just had a call from an astonished individual who has several hundred million pounds that he puts on deposit in various banks."
I have this uncle with several hundred squillions locked up in a Swiss bank account. All it needs is for a few hundred millions to be deposited in another Swiss bank account. You can share in the squillions when it is unlocked.
Please send the cheque to Lagos, Nigeria 419 !!
Thank you, kind sir !!
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Why not just take your saving's out of these greedy bankers bank and put it into Premium Bonds, we are going to get next to nothing in interest off them anyway, either that or stick it under the matress.
You may get lucky.
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I don't know what you are all talking about I have 20 different buy to let mortgages and the 16 that are not fixed, have passed on all the cuts in full.
I also have a small business loan of £3/4 million whose rate is also linked to the base rate and has the cuts passed on in full.
The only people i know who are not getting the cuts passed on are those on a fixed rate.
Who are these people who are not getting cuts?
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Shame on the BOE, they have given no thought to the pensioners who rely on interest from savings to survive.
How many more will have to do without heat or food this winter.
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Can you pass the details of this individual onto me, i would be extremely grateful if he could lend me £50,000 out of his hundred's of millions so i can clear my debt. that probably is only a couple of moths interest. Thanks
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This rate cut strikes me as the panic mode of those headless chickens masquerading as economists. There are people out there who understand how to produce simulation models of complex, non-linear systems. Those engineers who mathematically model large process control systems, or the people who produce the simulation models for modern weather forecasting. These are the guys who can define the transfer-functions of the building blocks that form our economy, not the super-annuated BOE and government economists, and certainly not the cub reporters pretending to be business journalists.
The problem was originally caused by too-low interest rates, making them even lower will mean that the reckoning next year will be harsh indeed.
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I'm a little offended by reading comments from "unhappy" savers. For crying out loud! There is too much selfishness in our society. The country is heading into recession and the government/BOE is at least trying to do something about minimising the impact. Give them some credit for that. What we don't need is selfish singleminded people moaning that their savings rates are falling. Get a grip and think about the people that the interest rate cuts might be helping and realise that you could indirectly benefit from it too. Inflation is falling, in fact you'll be better off even at a lower rates as long as the rate of inflation, as expected, falls lower.
I am a saver too but I'm not moaning because I understand that action needs to be taken to save our economy. If any measure helps to minimise the impact of the recession, I've got a better chance of keeping my job. I'd take that over a higher savings rate.
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#67 "which means the real rate of return of a 3% base rate could be quite high. It's a much better return than 5% interest during a time of 5% inflation!"
Will it also be better if the quids you get are worth US$1 (70 Euro cents) each ??
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Such a drastic move shows that it is now officially time to panic.
The problem is, this should really have been a rate cut from a substantially higher position, perhaps from a rate of 7% or more.
Had the Bank of England been tackling true inflation, which includes the cost of a home, then interest rates would have been higher all along. For some reason inflation in the cost of groceries is an awful thing, but inflation in the cost of our homes is splendid, and is to be encouraged even through policy. Idiotic.
Higher rates might also have reduced the scale of the boom and put the brakes on the grotesque binge on debt that has gone on over the past few years.
Now we have only 3% headroom to avoid falling into the liquidity trap and suffering a long drawn out depression similar to that experienced by Japan.
I mean, seriously, if interest rates of 4.5% on borrowing are considered extreme and too painful for us then what does that say about the distorted view of risk that has developed over recent years?!
The truly silly aspect is hearing the Government tell banks they should pass on the rate cut, when they themselves will be pushing up the cost of borrowing through the 'crowding out' effect of their fiscal policy...
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Do these funds relate to profit taken from your insider dealing syndicate?
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I'm laughing! My tracker mortgage with C&G will have now reduced by 36% in two months!
Bring on the bubbly...
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Credit Crunch ? wasn?t that the obvious result of lending money too cheaply. Good to see the BoE have got a firm grasp of that one then.
BoE remit ? just the one target, nice and easy, keep inflation to 2% give or take 1%. Now that they have failed on that they go back to crystal balling where the economy is going next.
Labour Government ? a fantastic earning opportunity, wait till they have been in power a couple of years (this gives them time to spend the inherited coffers) then short the pound for all your worth against any major currency except US dollar.
Banks ? the people who missed the last market rise on the back of the Iraq war so decided to invent a credit crunch, amass loads of money and create the next boom.
Stability ? that thing that companies crave more than anything from government, static interest rates (whatever they may be) and near fixed exchange rates, it allows them to plan.
Volatility ? what the market players need, without their dead. Shame it?s the opposite to what business? need but hey, there will always be more of them when the present lot go broke.
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These 'wise' men has reduced interest rates to rates not seen since 1953.
The inescapable conclusion must be:
- this is the start of a great depression on a scale even deeper and longer that the 1930s.
Or
- Rates should not have been reduced and the 'wise' men who gave us the bubble economy and credit crunch have got it terribly wrong are we will see and even greater bubble and crunch in a while.
Time will tell.
It is widely accepted that the twin causes of the credit bubble were imprudent banking combined with central banks having interest rates far too low for far too long.
The test of these 'wise' men will be if in a few months (6 at most) they return interest rates to proper levels of 6 of 7 per-cent. (And no further rate cuts.) If not this gamble will have failed and we will all be bankrupt. Then it really will be twenty years of hard slog. This is the last throw of the die.
If the idea is to kick-start the economy then OK - but it must ABSOLUTELY not be to create an economy that runs continuously at these insanely low interest rates. If this is the result then we will have see just how 'wise' these men have been.
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Does Robert Peston understand the term good news? We all don't have friends with many millions to chuck at banks, but some of us have tracker mortgages that benefit massively from this interest cut.
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Halifax online still pays 7% to retail investors. I'm astonished just as much as everyone else - and concerned that the bank's deposit rates are so high when rates from the BoE are so low.
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bert bert bert - whilst the analogy is probably correct the bold headlines are nonsense
pure economics would dictate that if you have zillions to deposit then the banks will of course offer these deals but this type of deposit does not tend to sit long and there will be preferential rates involved
bert - devil is in the detail and your lack of it/ or understanding of it is incredible
bring your blog back to the real world and admit it is a good news story for once
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#7 asked who sets LIBOR?
This paper explains...
http://www.bba.org.uk/content/1/c6/01/36/32/BBA_LIBOR_facts.pdf
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"Why does it matter that this holder of squillions is still being offered almost 7%?
Well if he's being paid almost 7%, what chance is there that small businesses will be able to borrow at less than 10, 12, 14% or more (with the actual rate depending on an assessment of their credit-worthiness)
Those who most need a substantial cut in the interest they pay - hard-pressed businesses, cash-strapped households - are unlikely to enjoy more than a small reduction."
Why are banks having to pay such a huge premium over BoE policy rate? Isn't this a far more important topic of discussion than what this will mean to lending rates from banks to small businesses?
I mean, if banks offering to pay the BoE policy rate on their borrowings results in no one being prepared to lend to them, then they have no money available to re-lend on to anyone else - at any sort of interest rate. If the only way banks can attract deposits is to pay well above the policy rate, then of course whoever borrows this money from the banks is going to pay higher rates of interest than Brown/Darling would like to see.
To those who would suggest that the solution is for the BoE to lend to banks at its policy rate, the answer is that the BoE has no money to lend. All money lent by the BoE has either to be borrowed or printed. The BoE can hardly borrow at a much lower rate than the commercial banks, so it's not really able to lend it out again at 3%.
Which is why the divergence between Policy rate and LIBOR is not down to the banking sector's greed or intransigence, but to the politicians not being prepared to accept that there are some cloud-cuckoo-land worlds that just can't be imposed on reality.
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Who benefits? I do - by £312.50 per month. The reason is that I have a tracker mortgage at 0.5% above BOE base. The bank that gave me this deal a few years ago must be kicking themselves for not linking it to 3M LIBOR.
By the way, if any bank is now offering a deposit or treasury rate of 7% DO NOT LEND THEM YOUR MONEY. There is something seriously wrong at any bank as desperate fir funds as this.
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I own a house outright.
Can I take out a 4.5% tracker mortgage and put the money on deposit at 7%?
Seems like its to good to be true. Is it?
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Stunnedandconfused should contact Close Brothers Ltd to get 7% gross on minimum deposit of £10K. Offer closes on 10th November.
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First of all, I truly hope that the banks that dont pass on this rate cut are hassled by their customers by boycotting their monthly payments. Maybe that will force their hands. They have so many people in arrears, lending is so risky, and when its within their power to reduce the burden on borrowers, and help themselves! they dont bother. Why should we stick to our side of the deal and pay at all. I hope they get this rate cut stuck right in their throats if they dont react.
Secondly, to al the people who can afford to have savings, I'm extremely happy for you. Must be a nice situation to be in, not having to borrow to survive. Their whinging and moaning about not getting so much interest is extremely sad indeed. I'm truly hearbroken for them.
The savers upswet is maybe understandable but these are people with their heads above water, the people who can breathe in and out without feeling like they are drowning. Spare a thought for the millions who've been encouraged to borrow to buy their own place and do better for themselves. These people are the ones that will lose their jobs, their homes, their families, their lifestyle, their dignity and their pride. Let alone their respect from afluent members of society.
If you have savings, be happy that you are getting some interest. Spare a thought for those less well off for a change.
These are tough times and the BoE have taken this decision far too late in my view. Too many people have already lost their jobs and livelihoods. Why is it that a group of so called intelligent people brought together to read the market, got this so wrong and for so long. I dont see any excuse, the general public felt this happening, I dont know many people who are surprised.
As for inflation, this was an 'inflationary bubble' and its pretty obvious that within a 12 month window of prices moving up, assuming that there are no other wage pressures and general economic trends for upward pressure on prices (which there are not) the inflation figure would drop back sharply. In fact leaving this decision so long will now mean we could be looking at negative inflation which is a hideous prospect for everyone. Of course food prices went up, they are affected by fuel prices, why is that a surprise. They kept saying they had to be cautious but they must have been kept in a dark room to miss all the obvious signs in the last 12 months.
I'm happy they moved the rates down, but I believe the rates should and need to be closer to 1% to make a difference and perhaps then the impact will be short and sharp and give the economy a real kick. Playing with 1 or half a % point is just a useless effort.
1% rates for 3-6 months, stabilise the economy, and slowly increase them again once the labour market and housing market show signs of recovery. That is going to help!
I'm furious that we, the general public, have had our current and future tax money pumped in to support the fat cats, and now they are sticking 2 fingers up at us.
As for the Government, what a complete shambles. They should have removed the MPC's restrictions on inflation targets a year ago to give them the ability to move interest rates. Inflation might be worth controlling with interest rates but why didnt they see the writing on the wall. Heads should roll, and we should start at the top and get rid of Gordon Brown whos resided over the worst economic downturn to hit this country in my lifetime. No excuse about global financial issues, he's had it within his power to regulate this for 10 years!!!
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This comment was removed because the moderators found it broke the House Rules.
#83 "In around 118AD, Hadrian won great popularity by cancelling massive amounts of debt. Can we learn something from this?"
Yes !! Keep your armies well supplied or the foreigners, upset about their losses, will invade and destroy you !!
Why do you think he build a bloody great wall in the North of England for ?? To keep the sheep from running off ??
I believe the kilt wearing characters on the other side of the wall had something to do with his decision !!
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We OWN the banks, why can't we TELL them what to do? Have I missed something (apart from being a slave!!!)
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Appreciate the libor and BOE relationship has broken, and lending has contracted, but as a mortgage holder on a tracker product, I have moved from 5.89% to 3.14% in 9 months, thats a huge cash saving for me.
I think circa 15% of UK mortgages are trackers !, you can see why they have been withdrawn. Nice to be on the winning side of the equation with the banks for a change.
Given the generally high deposit requirements still out there, and a reluctance to lower SVR's in a hurry...the BOE reduction is not going to have a big impact on the mortgage market or for first time buyers sadly.
It will get worse before it gets better. We should launch a get libor down campaign.
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Once again, for private individuals, the profligate are subsidised whilst the prudent are punished.
Cannot anyone get it into their head that, for individuals, a morgage is a necessity - any other loan is a needless luxury. Savings form a major source of income for lots of the elderly and any cut in the interest rate that they receive has very significant consequences.
Let's have government legislation to raise all personal non-first mortgage loans to at least 25% APR and use this money to subsidise personal savings.
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I suppose the only companies to succeed in a recession are the stack it high sell it cheap ones.....
The Primarks,Wilkinsons and Woolworths of this world.
Aldi of course.
Everyone one else will lose custom as people on smaller incomes desperately try to save money !
Afterall, Inflation is running between 7 and 12 percent, depending on what you try to buy !
Invest in a vegetable garden or fruit trees.
Their yields won't be affected by interest rates or inflation.
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If the new owners of Northern Rock were to set an example of passing the full rate on to lenders could this start a new price-war in the mortgage market and get a few heads out of bottoms? All these Bankers want a good kick up the a*** - form an orderly queue please!
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Robert advises that a person with millions has obtained interest at 7% on his money. I know of an organisation which receives 12% for providing money to the Banks - The UK Government.
That is now 9% over bank rate - Is this not an outrageous rate and just as bad as the interest rates charged by banks to small businesses.
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Ho hum, so now I, like many others, am going to have to work even harder to make up the difference between the income from my savings and the cost of my needs.
Is that what they mean by 'stimulating the economy'?
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The very worst thing a government can do is to make money valueless.
You need modest interest rates (circa 10 percent) if you want money to have a value.
Low rates only lead to problems.
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96. At 2:53pm on 06 Nov 2008, roy wrote:
Such a drastic move shows that it is now officially time to panic.
----------------------
This 'drastic move' is just the Bank of England "doing the right thing" as Alastair Darling hinted at/instructed them to in his interview on Radio 4 a few days ago.
As for the timing, well it has occured nicely between 8:00 am and 10:00 pm EST, thats Eastern Scotland Time.
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A lot of people are going to be worse off - especially pensioners whose income is partly derived from interest paid on their savings. I, for one, shall have far less money to spend, so in fact I shall not be helping to ease the recession.
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As excellentVersatile pointed out, lots of people would gladly pay a higher interest rate than the banks.
In fact, Robert, this is a great business opportunity for your friend - all those squillions could be very profitably lent at 9% to small businesses...
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Surely the government has lead the way here. If they charge a coupon of 12% for their pref shares, the banks are going to follow suit, or am I just naive.
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Since we own Northern Rock, why not have them exclusively borrow from the BoE at preferential rates? We need to make sure that any mortgages given out are not the usual self cert or 5x mortgages they used to deliver. House holders will then start to move from the major banks across to NR. If the banks want to keep their mortgage business, then their rates will need to drop. Job done.
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Like it or not banks are the big short term winners here. But the plus side for everyone is that their confidence may go up over time as the banks get their books back on track, which in turn opens up competition which leads to better deals for everyone in general.
That's the best case scenario and the only one worth contemplating.
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I think many of the banks need to learn a bit about the value of loyalty and openness and hopefully this seeming abuse of power over the general public will lead to customers moving to banks more willing to share these rates cuts more fully.
I have a mortgage with Lloyds TSB, who I think are one of the few who have already said they will pass on the rate cuts to their variable rate customers, so good for them... as long as they do what they say of course!
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If commercial banks were legally forced to offer money market deposits at a small spread under Libor (say 25bps) then the BOE could take advantage of them (by round tripping) if they did not lower Libor rates to be more in line with base rate.
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Maybe I'm being daft but now we've got low interest rates again, lower fuel prices and lower inflation, shouldn't this signal the start of the recovery? Ooops, forgot, we're all waiting for the Banks to dish out our pocket money!
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Well, what if everybody moves their savings to Ireland, (say, 3.5% and.... a 100% guarantee from the Irish Gov.)?
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@109
1% interest?
I'm glad your name isnt Merv King
You sound just like the type of person who slams on the brakes when they see the Fake Cops in their "Traffic Officer" Nissans causing a crash that the Fake Cops can clear up.
Talk about self fulfilling prophecies and bad ideas in the first place
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The number of posters that are crowing on about how much they are saving just shows the extent of the problem:
They were lent too much and are relieved (that they might) have that cut passed on.
An economy built on borrowing needs
Willing Lenders
Willing Borrowers
Available funds
Cheap money
If any of the above three stall the economy fails so the BoE cheapens the money to get the part that has broken
When it has all broken you have to rebuild the economy on a totally different model
Federal Reserve Banking is dead and will not be recovered by any means.Period
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Mervyn can take his bicycle clips off....for the time being...
How to get banks to lend? Government 'owned' banks can surely show the way, all it takes is a little pressure. The others will soon have to follow.
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Great blog piece Robert, now the US electon ballyhoo is all over - we're back talking about interest rates, market turmoil, big banks, a troubled economy, recession...blimey....its just like old times :-)
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We give these institutions billions and they will not pass on an interest rate cut to us?
What blatant, barefaced robbery.
The common man is being bled dry on all fronts. Banking, fuel, energy, food. Each time these institutions cite some complex market force as the reason why we are paying more for whatever.
What I would like to know is why have we not heard more from our leaders and the regulators on the subject?
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I believe my mortgage debt is now 60% owned by the government so hopefully they will set an example to all other banks and pass on the full 1.5% cut.
Savings
What is the point of having cash savings with a very low interest rate with high inflation if you still have mortgage debt?
Do what I did get a flexible current account mortgage and cash all your savings in and pay the debt off. You reduce your monthly interest payment & pay your mortgage off quicker. Every single pound is working for you. As soon as the interest rate is cut I am saving money not losing interest on savings.
If you have no debts, don?t put your money in a savings account buy property.
There are some real bargains around at the moment. In the long run you will get a bigger return on your money.
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Isn't the BoE Interest Rate just a big con? Holding them low while real inflation (money supply) let rip is precisely why there's a problem now.
In any other industry, if the banks all followed one leader they'd risk prosecution for running an illegal cartel. Rightly so.
That applies to LIBOR too. If Bank of Prudence commands the same rate as Boom&Bust, something's wrong.
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but this cant be right ??? even though the Government has promised not to tell banks what to do !!!
Lord Mandelson has promised they will pass on the full cuts.....
would it not be better for the government to lend the money straight to the individuals for mortgages rather that have the banks dictate what they are going to do with tax payers money ???It would seem the Government have lost control after backing the banks....
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If the banks aren't passing the cut on is it because they are terrified about the economic outlook and if that's the case what do they know that we don't?
If it's simply a case of making money then the government have to force them to pass it on.
As the government owns Northern Rock surely it can insist that the cuts are implemented there - if one bank starts attracting customers maybe competitive instincts will force the rest to follow?
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Stop beefing and vote with your feet now, before the Euro goes to parity. Don't forget to turn the lights out after you, last one out of the UK.
It's all very well describing the syptoms, the diagnosis is what's important and this looks like terminal necrosis. What once might have responded to penicillin is now past excision, and even radical amputation might not save this patient.
Like I've been saying for months now, the real economy's elsewhere. When M&S, Tescos and Sainsburys all have their own banking operations, then the role of the retail bank's nearly defunct, so cut them out of the system and return to cash-clearing between corporates and the individual. HMG is out of the loop, whch means their financing positions versus the banks becomes funny-money.
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Post # 109, geoff8.
Your comments on savers is interesting in as much as I'm afraid your envy is showing. Not very bright, I suspect, perhaps if you removed your head from your fundament you would let some air and light into your head.
Ponder on this, some NET savers have been borrowers over many years in the past, indeed were possibly around, like me, when interest rates hit 15%. But they, and we, coped and kept on plodding on for modest wages, paid our dues, put kids through college, and avoided over-borrowing for credit card debt and re-mortgaging to pay off holidays etc. Now we have retired, paid off the mortgage, and yes have some savings, but it was ALL earned, at times it was VERY hard, but we managed it. And happy and relieved to do so.
I did have sympathy for the people in debt who had not been profligate, so I shall now lie down and try not to lump all of them in with my disdain for you.
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As an advisor to small companies paying banks 2.5 to 3% over base PLUS penalties and "review" costs where the overdraft is stretched, I find the idea that a rate reduction will stimulate the economy bizarre.
What would get us going, is no reduction in rates so that savers are not fearful of spending their earnings from savings accounts, and a temporary tax change, say for one year to be reviewed, of £ 2000 increase in the tax free band. Suddenly the average home with 2.2 people working would have £20 net of tax per week more in the hand, debts could be repaid, mortgages met, Christmas could be fun and the costs as I see them, to industry and the government, would be met by lower dole payments, and a relatively quick increase in corporation tax yields. Tax reduction stimulates, rate reductions instill fear to spend.
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This just confirms my long-held theory that we are led by a bunch of headless chickens. The BoE has proved, once and foir all, that it is not in the least bit independent, since it was effectively bullied into this decision by a combination of an inept government, reckless businesses and stupid consumers.
This will just make a bad situation worse.
Indeed, if I hear that oft-used phrase 'restoring consumer confidence' one more time I will go bananas! The situation we are in has nothing to do with confidence, but insolvency, i.e. more money has been borrowed than we have the capacity to pay back.
So who will benefit from this action?
Nobody.
Those who saved and never bought into this crazy economic mirage, will be hit with pathetic rates, but then just sit tighter still on their hard-earned savings through sheer fear of what ill happen next; those who were reckless and relied on a credit tap, will not have more access to money until they have paid back the money they already owe and so will not be able to spend, spend, spend, even if they would want to; and the banks will just sit on the majority of the cut because they are up to their ears in bad debt, need the money, and scared stiff that soon even more on their books will start to default - and they won't be lending out any more money when there is a good chance that businesses will fold, people will lose their jobs and so risk even more defaults.
The time for action was over the last decade when rates should have been raised to prevent a credit crisis. But, like someone who runs his immune system down and, as an inevitable result, catches flu, the only way out is allow things now to run their natural course. It won't be pleasant, but sadly, that's the price we are having to pay for Thatcher/Major/Blair/Brown's so-called 'Golden Age'.
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1% is not working in US so what makes this bunch of idiots think 3% will work !
THEY ARE ALL MAD - and we are paying for it , i can see this and i am nobody !
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#55
An excellent post..
I also have a mortgage, but I didn't go and buy a house that I couldn't reasonably afford.
It's not the amount of multiples of your salary the bank will lend you or the % LTV ratio It's about personal affordability...
It's about time people realised that you have to take responsibility for your own actions
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Who will benefit? People who have borrowed, and particularly people who have borrowed too much.
Who will lose out? People who have saved, and particularly people who have saved a lot.
I look forward to my life savings earning a rate about 3% below inflation.
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I recall the last time when we had the fuel blockages that certain garages raised there prices because they had fuel on stock in a blatant profiteering exercise.
the vast majority of those profiteering garage owners are now out of business because when things returned to normal Joe Public remembered the profiteering and deserted them in droves.
The banks would do well to learn that lesson.
The last bank to drop thier rates will be the first one to fall
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To all the savers out there.
Go out and spend, you're country needs you!!!
Why take it with you, we all die in the end.
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If the government had any intention of reducing the cost of borrowing for mortgage holders and small businesses they would lend directly through Northern Rock and would therefore be able to dictate lending rates over banks would either have to join them or lose business.
However as there has been no interest in Northern Rock to reduce rates then I suggest this is yet another example of allowing the Banks to recapitalise their books at the expense of the customer by increasing their margins.
Also I would like to know if the bank of England understand economics in any sense. As I understand it we have a laughable indicator of inflation called the Consumer Price Index (CPI) and this is currently 5.2% (target is 2%) and we appear to be ignoring this inflationary figure and lowering target rates to 3%. I have heard many highly paid economists on the news recently remarking that commodities have come down massively in price and therefore inflation will come down as well so we can ignore inflation. This would be the case if for instance Commodities were priced in GBP but as they are priced in USD and the USD has strengthened against the GBP we are still subject to high commodity prices in GBP terms. These interest rate cuts will only serve to weaken the GBP which will cause an inflationary burden on commodities, add this also to the fact that we are a net importer predominatly from currencies that are pegged to the USD or a basket of currency predominatly pegged to the USD means all products we import will cost our retailer more and inturn they will pass that cost on to you and me the consumer again more inflationary pressure.
The recent spending on bailing out the banks puts increased pressure on our ability to raise funds through selling Gilts to foreign investors however Given the yield on your 10yr Gilt is currently 4.33% and CPI is 5.2% as well as you're investing in a weak currency It may not be so easy to raise capital in the GIlt Market.
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Wot?
no talk of the effect on the value of the pound!!!
PS. I saw and Australian bank offering 7.10% on deposits.
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geoff8 is a way out of line to belittle those who have saved for a rainy day. Most people with savings are in that position because they were not dumb enough to fall for the 'buy now - pay later' blandishments, people who never paid interest on credit cards, people who don't pay more for their clothes to have a designer label, people who don't buy the latest car with go-faster stripes and people who don't pay more for bottled water than they do for petrol. If you can not pay cash - don't buy! I am one of these such people and now I am being penalised by the actions of idiots who were persuaded to over-borrow.
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I'm sure that savings rates will fall a darn sight faster than the mortgage rates.
Most people I imagine, have less than the squillions that Robert's friend has, and will see the real value of their savings fall due to the reduced interest rates and rising inflation, and all to bail out those who spent money that they did not have.
The ones I feel most for are the pensioners who saved to help make their retirement easier, and are now penalised for doing so.
And besides which, I'm sure that people should be encouraged to spend even more than they have already, and presumably on the 'never-never' again, that they have no intention of paying off.
The prudent ones who don't use credit cards beyond what can be paid off each month, who fixed their mortgage rates to plan ahead, and who save a little for rainy days and emergencies will, as usual, be the ones who will definately NOT be the winners today.
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93: Mr Gladstone's bag
What are you on about?:
'There are people out there who understand how to produce simulation models of complex, non-linear systems. Those engineers who mathematically model large process control systems, or the people who produce the simulation models for modern weather forecasting. These are the guys who can define the transfer-functions of the building blocks that form our economy...'
My God! What a mouthful! Are you a modeller by any chance? Possibly employed by a major bank? If so take a walk outside and look at the stars, breath in the air, go on, touch something real, maybe the wall nearest you or a blade of grass. That's right, it's called: R-E-A-L-I-T-Y.
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A 33% reduction on BoE rate - and possibly a bit more to come - is a once-and-for-all opportunity not to be missed to reduce the unsecured personal debt in the UK.
Apart from pushing the banks and mortgage companies into following the BoE's reduction, the BoE and govt need to ensure that credit cards are brought into reasonable line by (a) putting a cap on the interest rate and (b) increasing the minimum payments so that they are actually paid off.
At the moment credit card companies = banks are making money hand over fist to plug a hole of their own making at the expense of the ordinary credit-worthy customer.
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"So far as I can see, the only people to benefit from this rate cate are the irresponsible borrowers who contributed to the problem in the first place.
There's absolutely nothing in it for anybody who's been prudent...
Its a completely ricadoolious way of running the economy."
Yep. :)
Welcome to New Labour's Britain.
To take a line from Planet of the Apes,
"It's a madhouse! A maaaaadhouse!"
Don't bother saving. Don't even bother working. Just borrow to the hilt and try to get someone else to work for you. Try to get into buy-to-let, for instance, and hope to god that there are enough people stupid enough to work hard to get an education then work hard in a wealth-generating job, all for your benefit. Lord knows it won't be for their own.
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Your latest comments about the way the UK banks are behaving simply confirms what most decent citizens of this country have long believed is wrong with the supposedly free and democratic society that we live in. It clearly shows that it is possible for a small group of unscrupulous and largely unelected people can abuse their power and in effect hold the country to ransome.
By their actions these senior bankers are clearly demonstrating that they have a total disregard for the well being of this country. That includes the government of the day, both Tory and Labour, UK bussinesses and ordinary UK citizens.
The only thing that concerns these people is maximum shortterm gain at any cost.
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#109
"Spare a thought for the millions who've been encouraged to borrow to buy their own place and do better for themselves. These people are the ones that will lose their jobs, their homes, their families, their lifestyle, their dignity and their pride. Let alone their respect from afluent members of society."
How do they better themselves by owning a home?
Who encouraged them to borrow?
Why didn't they TAKE RESPONSIBILITY FOR THEMSELVES and not borrow more than they could afford in the event of a downturn?
Or are these the same people who believed there would be no more boom and bust?
Maybe these are the people who took out 100%+ mortgages which IMMEDIATELY PUT THEM IN NEGATIVE EQUITY?
Or they might even have effectively COMMITTED FRAUD when they applied for a self certified mortgage and lied about their income?
Get real.
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Mmmmmmmmmmmmmmm?????????????????
I WONT DEPOSIT WITH ANY UK BANK AT LESS THAN 6.75% YOUR MATE ROBERT IS NOT ON HIS OWN.
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Interest rate cuts?
I want to know when someone in Parliament is going to champion the cause of of the DISPOSSESSED and the SOON TO BE DISPOSSESSED and the SCARED-STIFF-OF-BEING-DISPOSSESSED.
This is LIBERTARIAN:
"Libertarians are committed to the belief that individuals, and not states or groups of any other kind, are both ontologically and normatively primary; that individuals have rights against certain kinds of forcible interference on the part of others; that liberty, understood as non-interference, is the only thing that can be legitimately demanded of others as a matter of legal or political right; that robust property rights and the economic liberty that follows from their consistent recognition are of central importance in respecting individual liberty; that social order is not at odds with but develops out of individual liberty; that the only proper use of coercion is defensive or to rectify an error; that governments are bound by essentially the same moral principles as individuals; and that most existing and historical governments have acted improperly insofar as they have utilized coercion for plunder, aggression, redistribution, and other purposes beyond the protection of individual liberty"
Note in particular!
".. that robust property rights and the economic liberty that follows from their consistent recognition are of central importance in respecting individual liberty.."
I SAT NEXT TO A SELF-PROCLAIMED LIBERTARIAN IN THE LAST ELECTION CAMPAIGN AT A HUSTINGS MEETING IN SLEAFORD LINCS.
His name was Douglas Hogg.
Even though I have met him and shaken his hand and campaigned fairly against him and sat next to him in a Parliamentary campaign and even though he is a QC I have been unable to persuade him to do ANYTHING to stop the dispossession.
DISPOSSESSION
"To deprive (another) of the possession or occupancy of something, such as real property.."
He, the Libertarian, thinks it is wrong to distinguish between the:
"undeserving poor and the deserving poor"
WHO MADE THESE PEOPLE POOR?
This is being repeated all over Britain. Where are our MPs. If they are not campaigning against the TRAINWRECK taking place in our county courts they are working on something LESS IMPORTANT.
"Go to the Citizens Advice Bureau there is nothing I can do" said Cons MP Edward Leigh to one hard-working member of his Gainsborough Constituency.
FOR A COUNTRY THAT CROWS TO THE WORLD ABOUT ITS DEMOCRACY THIS IS A NATIONAL DISGRACE AND A FAILURE OF DEMOCRACY AT EVERY LEVEL AND AN INDICTMENT OF EVERYONE AT WESTMINSTER AND THE OBSEQUIOUS JUDICIARY WHO EXECUTE BRITAINS DICKENSIAN LAWS ON DEBT.
GC
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Mr Preston has a friend who puts several hundred million on deposit..... just who does Robert Preston work for ? He has certainly made a career out of stoking up hysteria.
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BoE can do what they want - it makes no difference to mortgage payers - except when the rate goes up, the lenders don't hang around then do they and pass it on immediately to us? These banks are all a bunch of colluding bastards who operate illegally and have no morals.
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For those of you interested in LIBOR and how its calculated.....
http://news.bbc.co.uk/1/hi/business/7680552.stm
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Would be very interesting to know which bank is offering 7%. the most I could find is 5%
I have ISA with Lloyds and they keep reducing rates: in 2006 it was 5%, currently I get 3.75%, which is below the inflation.
How long and how much would I have to save for deposit for a house? Pension?
Is there any point to save at all?
People are so much encouraged to spend and borrow which actually coursed this crisis.
And again with this 1.5% cut only whose who are in debt are to get a benefit.
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So which Housebuilder stands a chance of surviving a recession ?
Or are they all doomed to Insolvency or Nationalization?
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@150 and others
The mistake everyone makes is that they think you should either borrow until you can only just afford it then default and bankrupt yourself when things go wrong or save and only pay cash for what you can afford now.
Neither strategy is optimal.
It like advocating either a 1 stop or a 3 stop strategy in F1 when the most stable and efficient way to have your cake and eat it is to do a two stop strategy.
Borrow what you can pay back even if the times get worst case scenario bad. That is the way good governments should do it.
Labour governments have always gone for the profligate 3 stopper borrow spend borrow spend never pay back unfortunately the busts have always resulted in them being thrown out of the race.
I love mixed metaphors dont you?
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"I have had numerous calls from friends who have worked out how much better off they are a month and already working out where they can spend it "
Perhaps they should take the opportunity to reduce the mortgage on their property?
Interest rates go up, interest rates go down - if you don't reduce the value of your mortgage when you can then I have no sympathy if you can't afford your mortgage when rates go up.
My bet is that banks will reduce lending rates but only for those with 30%+ equity left in their property. For those with 90% mortgages and such rates won't come down - banks don't want to know you since they know that it is likely that:
1) you will lose your job
2) The value of the house will not cover the loan in the next 12 months.
Would you lend money in these circumstances?
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Re Stunned and Confused:
You don't need millions : eg Anglo Irish offering 7% to one and all...
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I'm a bit mystified why so many posters keep telling us that interest rates will cause the pound sterling to collapse in value and inflation will follow.
The pound sterling fell sharply recently with no rate cut, clearly that is not the only factor.
Remember that the credit crunch is the most draconian constriction of money supply on record - that is highly deflationary.
The UK is not cutting interest rates on its own, the major central banks around the world are aggressively cutting too.
With all cutting rates the comparative advantage effect of one nation cutting rates to affect exchange rate is much reduced.
And as I and others have been saying for some time this country is headed for deflation by the end of 2009.
The myth that there will be a massive surge in fast price rising imports is false - in fact people will turn more towards UK manufactured goods and services as they become more price competitive, boosting our economy, and our exports will become more competitive and will be in demand in other nations boosting our exports.
I suggest economics 101 for some of you.
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# 107
Oh come on.
7.2% is your gross return. That means before income tax is paid. You pay 20% at source (that means the bank collects it for HMRC) leaving you with 5.76% but then the large income would probably make you a higher rate tax payer costing another 20% giving you.
4.32%. You are losing 0.18% plus inflation.
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This interest rate reduction will benefit our household as we have a tracker mortgage.
However, we will not be spending the saving and, indeed, have made detailed plans to spend even less next year.
In such uncertain times we are going to hold on to as much of our cash as possible. And I don't think anyone can blame us for that.
I cannot see this latest base rate cut having any impact on what is happening and what is coming with regard to a recession/depression.
And, to add to it all Sterling is now going to take a direct hit in its value - and thats going to make us all poorer.
For me, the bottom line is.....hold on to your hat and kiss your .......
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So what does Robert Peston think should be done to sort out the banks ? the Bank 'o' England graciously offer down a massive drop in the base rate , then the banks say, well there's no hurry in passing this on to the consumer ! hold your horse a mo! Do the banks think they actually run this country all of a sudden ?Surely the treasury must use it's teeth to force high street lenders back into the lending market, otherwise where does it all end ? after all they have been given zillions of tax payers hard earnt pounds !
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NEW FILM:
'BUST ON A STREET NEAR YOU'
PRODUCED BY CLUNKING FIST ,PRINCE OF DARKNESS,MERV,DARLING THE SCOT & FRAU SMITH. SCREENPLAY BLIAR BLAIR.
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Those (like myself) who were lucky/prudent/lazy enough to be on a tracker mortgage will get the savings. others will not.
If the banks want to lend, they will and should only lend to those able to pay it back, and if they don't think this will happen, they will charge accordingly. (this is how credit works - if one in 100 people will default, those other 99 will pay a premium so the lender does not lose out.
if you don't like the rate, move to a better one. if you can't move - rest assured that you locked yourself into the rate with the belief that this was the right thing to do at the time.
If no-one will lend to you - get the message - maybe you shouldn't be borrowing right now...
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Completely the wrong approach. GB should have capped credit card rates at a maximum of base rate +10% and then capped fuel and energy prices at Apr 2007 levels.
That would bring relief to household budgets, encourage spending and still maintain an incentive for saving.
.
Or is he keeping that for closer to the election?
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Looking at the collapse of Sterling I'm just glad my country is in the Euro area.
The euro is a major global reserve currency.
How quaint to have ones own currency.
Whither now Nigel Farrage and UKIP and Save the Pound ?
Save the Peso perhaps ?
I have no pity for the Blue Rinse brigade who's pensions and investments are melting.
After all it was they who voted UKIP and Conservative and Save the Pound.
Denmark referendum in 2009.
Sweden follow suit.
UK Independence, you got what you wanted - Little Britain indeed !
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#137 "Lord Mandelson has promised they will pass on the full cuts....."
...and you believe Teflon Mandy ??
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150 I would like to say how much I agree with your comments, savers who saved for the rainy day are penalised for the actions of the idiots.
Question - why can we not reduce the tax on savings by 50%, can somebody get GB or AD on to this urgently. Increase ISA limit to £10k per year
What would happen if all savers started to withdraw there savings between now and end of the year , can somebody tell me ?
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Robert
I have this great idea so the government can put money in to the economy, without having to rely on the banks goodwill...
How about giving everyone a tax credit to use against the interest payments on the mortgage on their main home?
Thought I might call it 'MIRAS' - see a bit like 'midas' but not quite... standing for 'mortgage interest relief at source' or something like that.
What do you think?
Tell you what, put it on 'buy to let' mortgages too and maybe the landlords will pass on some of the benefit to the tennants.
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Has no one who is on here winging that their prudence hasnt paid off ever considered that with risk comes reward.
Those that have (over)stretched themselves may now actually be able to reap the rewards of taking the risk, enduring the sleepless nights and worries, where as the boring PAYE 2.4 children amongst us will continue with their boring PAYE 2.4 children lives and moan when other actually make money.
This is economics people and it will all happen again in 10-15 years time, it always does, maybe in a slightly different form, for slightly different reasons, but its this that makes it all worthwhile.
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Further to my earlier post #153, why not legislate so the credit card companies link the interest you pay to the amount you pay off. The more you can pay a month, the lower interest you are charged.
We keep complaining about the level of personal debt in this country so why not do something to help people rather than the usual response of banks.
Just a thought.
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There are a vast majority of winners out there today, when things are as tough as they are it is the BBC's responsibility to provide a balanced report.
Modest succour is afterall succour. Green shoots should be nurtured.
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Why doesnt the government set up a state run 'high street' bank like the Sver bank in Russia and let the rest of our greedy banks fight it out down to the last three banks left standing to provide a bit of competition to the state one. Then the government could put our money safely into the state one and know that it will be applied as directed.
The banks, which really means the individuals who are being salaried by them, are hanging on like grim death and to hell with the rest of us.
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Ahhh what a surprise, more negativity from the merchant of doom himself, Robert Peston.
Will you ever say anything positive about our economy or do you derive pleasure from doing what you can to help make things worse?
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Comment No 28 misses the point. It may be reprehensible, but thrifty individuals are not wanted at the moment. Like it or not, right now the economy is crying out for demand. If you've got it, spend it.
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Are interest rates alone the right mechanism? Would a tax incentive for commercial investment coupled with a pre Christmas cash rebate to basic rate tax payers not work better? Retail spending would be stimulated in the short term with increased commercial activity enhancing the longer term.
John
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As someone with...
No debt
No savings
A Bank of England Base Rate Tracker Mortgage
...I'm overjoyed. An extra £139 a month straight away, the bank has to pass the saving on to me. Good choice that Bank of England Base Rate Tracker Mortgage.
Surely everyone went into their mortgages aware that it was the providers choice whether to pass on savings on standard trackers? You made the choice, maybe you should have predicted these changes and gone with a different mortgage? Moaning after the fact isn't going to help.
Now I can pay afford my Gas bill that triples as from next month..... !
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Why cant I borrow from the Bank of England directly (at 3 %) and cut out the greedy middle man ?
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#155 "By their actions these senior bankers are clearly demonstrating that they have a total disregard for the well being of this country."
Is it the well being of this country or the well being of the greedy and profligate who have over-spend and now needs something to help them spend more ??
Meanwhile, the pensioners, who are a growing minority of this country, are being punished for their careful ways. Just remember they, too, have the vote and they will not forget who made them lose out in order to pay for the spend, spend crowd !!
Enough selfish, greedy people have put out enough porkies to put Melton Mowbray out of business !!
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I'm confused.
So the answer to massive overborrowing is to borrow even more?
Surely, when you're up to your neck you stop digging?
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Astonishing Robert! A few moments ago, it was a "friend" of yours with the untold millions, and now it has changed to an "individual". Touch of the 1984's!
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At last we have a banking system that recognises risk and prices accordingly (a lack of which has caused this situation) and the politicians are wanting them to ditch this new found prudence?
Ludicrous.
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Theres nothing good about deposit rates at 3% or less when inflation is at more like 13%.
Take off up to 40% tax on interest payments it would get to a point when its better to keep the dosh under the bed etc.
So if everybody with savings took it out and stashed it under the bed there would be an even bigger problem.
So dont blame depositors for expecting 6 or 7% which after tax and inflation is not that hot anyway.
THE RATE HAS BEEN DROPPED TO HELP GOVERNMENT BORROWING NOT FOR THE CONSUMER.
THIS ALL HAS THE PAW MARKS OF CLUNKING FISTER NOT THE MPC.
Alexander Curzon
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To poster #153.
No I'm one of those unregarded people, a design engineer. I use software modelling programs to determine how complex, non-linear systems work. The BofE economists also claim to use software modelling to help them understand how the economy works, and how best to plan for the future. The software used by engineers (and even the weather forecasters) has been shown to work; that used by the economists is either worthless, or (more likely) it's the economists, (who don't seem to have been at the front of the queue when intellect was being awarded) showing how apt the phrase 'garbage in, garbage out' is at this time.
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10. At 1:48pm on 06 Nov 2008, ClarkeP wrote:
Some people have mentioned that it did not save Japan (when they cut rates to zero for a long period) which is true in a narrow sense.
Is that in the narrow sense of being absolutely true? All this move will do is paper over the cracks for a while. The pound will now fall through the floor against every other currency, inflation will rise dramatically, and all just to put a floor under the property. market. Falling house prices are a good and necessary thing- the government's attempts to keep house prices high can only end in tears.
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Instead of giving the Banks money to hoard only to see them refuse to pass on interest rate cuts, the Government should allocate a budget, say £40 Bn, and give the Post Office branch network the job of offering mortgages to first time buyers only at a rate the government decides is useful. Max loan c. £160,000 and max LTV 75% and max 3 x joint earnings. When the big lenders see the best rated first time buyers taking these at attractive rates they may want to try harder to compete. The government will get price competition and volume moving and build a marvelous business to sell later to the benefit of the nation.
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Can you please explain to the public at large that banks don't borrow the money they lend from the Bof E, but instead borrow it from their depositors and from other banks ?
Once this is understood people can then realise why there is not a direct linkage bewtween B of E base rates and mortgage lending rates.
There are three main types of mortagage:
* "Trackers" here the interst rate is explicitly linked to the Bof E base rate. Borrowers with this type of mortgage will benfit from the BofE base rate decrease (sometimes there may be a minimum interest rate level that has been agreed to - but normally this will be no higher than 3% and so people with trackers linked to the BofE base rate will benefit from this cut)
* "Fixed" here the interest rate to be applied has been agreed in advance between the borrower and the bank for a certain period. Clearly there is therfeor no rate cut to be passed on
* "Variable" here the interest rate floats, largely at the banks discretion. the rate may or may not be passed on. relatively few people have this type.
The banking crisis has been in part caused by the banks overly accomodative lending policies and by peoply borrowing too much money to chase up the price of property to ridiculous levels. This was encouraged by the government who allowed loose monetary conditions to flourish, targeting a fallacious inflation target that ignored implicit inflation (in increasing mortgage and energy costs).
To solve the banking and liquidity crisis there needs to be a period of significant deleveraging of balance sheets and recapitalisation of the banks to allow them to have adequate capital to repay government loans and rebuild sound capital ratios. they will only be able to do this by making profits. This requires amongst other things a proper pricing of risk which in turn needs the spread between borrowing and lending costs to rise.
We need to realise that the NICE decade really is over - he wasn't joking
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Bob
Why havent you reported how short the Obama bounce was.
It was even shorter than the Brown Bailout bounce, at least that lasted 2 days
FTSE 100 4271.55 down -259.18 -5.72%
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As far as I can make out, the Bank of England reducing base rate in this manner is broadly equivalent to Alistair Darling walking into the Stock Exchange, shouting "Go up, Footsie, damn you" and expecting it to happen.
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If there is a big premium being offered on fixed rate savings accounts, maybe it is a risk premium. As a rescued Icesaver I will think long and hard before ever again locking my money up for a period in any institution. Who can be sure that the FSCS guarantee may not be withdrawn at some future date?
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MLR at 3%
MLR means "Minimum Interest Rate" or as I call it "Meaningless Interest Rate".
At present the more money you lend to the banks the more interest you get.
For example Gulf States 14%, HM Treasury 12%, Many Millions of pound 7%.
But what about the small saver? Mortgage or loan rates will not drop but the rates given to UK small savers will.
The unintended consequence of low MLR is to suck money out of the UK economy.
Sound like the perfect way to induce a UK recession to me.
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I don't quite understand your comments Robert.
Surely, the fact that the goverment has loaned billions to RBS, Lloyds, HBOS then the Prime Minister saying he wants cuts passed on means they'll adhere to the rates cuts because the Tax Payer "owns" part of the banks. This in turn provides competition, meaning if Abbey, Barclays, HSBC (HSBC / First Direct which seem to be adhering to base rate anyway) would need to respond by lowering interest rate or not do business? That or they won't be picking the cherries of the customers.
You're obviously close to Gordon (you wrote a book about him, and seem to be in the know) so why do you think interest rates from the owned banks won't be cut?
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This is a pointless exercise if the reduction is not passed on to business and consumers.
The banks will increase their profits after causing the credit crunch.
But that seems to be the way of it in our society.
So much for a Labour government, not much different than Tories.
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124 TimmyThe Troll
It's a great plan, but I'm not sure how NR's new management (UKIP, sorry UKFI) would be able to justify aggressively redeeming existing customers while offering market leading rates to new ones. Also I think Brusell's would have something to say!
Northern Rock needs to redeem these mortgages to pay back the money it borrowed (still, perhaps unfairly now) the most visible of the billions lent to banks.
Also it withdrew it's tracker products last night, so best of luck with it being an equitable, well governed government bank going forward!
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This just confirms my view that there remains a monstrous disconnect between the so-called "real economy", where the BoE Base Rate might normally be expected to apply, and the whole banking/inter-bank system.
The latter remains an unholy mess, despite the best efforts of some politicians and commentators to soothe our troubled brows. The "real economy" (which includes the likes of me) is suffering as a result of the unsolved mess in the banking world (and all its weird and wonderful hangers-on), to the extent that the normal levers of influence like the BoE Base Rate are, er, pretty useless.
Watch out for more seismic events as the tectonic plates of the banking system and "real economies" crunch up against each other, swing apart and crunch back together again over the coming months, causing all sorts of unexpected fissures to appear - to swallow banks, businesses, jobs and even the odd nation state or two.
Hold tight.
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Ah, # 186 but I have no debt including no mortgage, all my savings are in fixed rate products and I have a dual fuel fixed rate agreement. Bullet-proof, moi. You can't out-smug me, pal.
Be that as it may, the economic situation does not fill me with any joy whatsoever. No man is an island.
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@ 161 So why not tell us who the eight banks are that make up LIBOR so the Government can name and shame them?
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Hmmm. I'm confused too. My business has a six figure overdraft facility with one of the big four banks. Granted it's well secured and we aren't using it (rarely do) but we just completed renegotiating it a few weeks ago after this all blew up.
Our newly agreed rate is 1.85% over base with a 0.8% arrangement fee. Even when credit was cheap, this was a good deal. In the current climate it's perhaps an excellent deal - but maybe indicates things aren't as 'locked-up' everywhere as it seems.
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In the midst of all this madness, for that is what it is, I fully expect TV stations to be interrupted with:
THIS IS THE VOICE OF THE MYSTERONS. WE KNOW THAT YOU CAN HEAR US EARTHMEN. OUR RETALIATION WILL BE SLOW, BUT NONETHELESS EFFECTIVE. IT WILL MEAN THE ULTIMATE DESTRUCTION OF LIFE ON EARTH. IT WILL BE USELESS FOR YOU TO RESIST, FOR WE HAVE DISCOVERED THE SECRET OF BANKING"
GC
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okay.... We got to where we are now by.... what?--- Wasn't it by promoting debt supported spending while dis-incentivising saving??
Surely the structural change needed should be getting people to save and , that way, try and get the debt/savings ratio somewhere near sanity.
I expect that while this policy WILL not only act to discourage saving but also hurt OAP's and others dependent on Investment income-- (not all of whom are wealthy plutocrats used to invittations every week from Mandy, George and Oleg for pie and chips on the Super yacht) ----it WON'T encourage small businesses or ordinary people to spend.
The last few months have shown the system is bust --- so relying on the old Greenspan stuff is like a person sitting in a burnt out car going brmm-brmmm! and imagining they'll still get to the destination. just like they always used to.
And I thought this was now the new era of 'Change we need'---- down at UK Finance Policy HQ it's obviously not filtered through yet.
I hope I am wrong
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I don't really understand the negativity on display here. I admit I'm no financial expert, but speaking as a member of a pretty average family I can only see good news in todays announcement.
When my fixed rate expired in October I took the surely obvious step of going to the bank and moving onto a tracker deal because anyone with half a brain could see that interest rates were about to fall and remain there for at least the next 12-24 months.
Now I'm sat here basking in the warm glow of a mortgage that is suddenly 70 odd quid a month cheaper than it was when I was on the fixed rate a couple of months ago rather than 40 quid more expensive as it was looking like being.
Most people in the real world are living hand to mouth at the moment unable to save and just happy to have the bills paid each month. So to be told there's suddenly going to be an extra chunk of cash in your pocket each month is a real blessing.
To be honest I won't be rushing out to spend it, instead it will be used to build up some savings which isn't going to help provide the ecconomic kick start the government will be hoping for but all the same I'm chuffed to bits to not have to worry myself sick about paying the bills for a while.
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A massive reduction in Bank Rate offered by the BoE is a pretty meaningless gesture. The problem is not the cost of credit so much as the availability of credit and availability depends on supply. Those of us who supply cash and savings to the banks (and we do still exist) will now have to find a new safe home for our assets away from the English banking system thereby tightening credit availability even further.
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#168 Your economics 101 appears extremely simplistic and targeted at 7 year olds.
"in fact people will turn more towards UK manufactured goods and services as they become more price competitive, boosting our economy, and our exports will become more competitive and will be in demand in other nations boosting our exports."
When was the last time a TV was manufactured in Britain ?? How many banana or cotton plantations are there in the UK ?? How much iron or alumina are mined here ??
Do factories and machinery magically appear just for the wishing ?? Or are they imported at high cost from somewhere else, paid for with hard cash ??
With high costs of imports of raw materials, how can our goods, with the addition of high manufacturing cost, *IF* there are even those factories available to manufacture them, compete on price with other manufacturers ??
And if you are talking about trade barriers, please remember that trade barriers are just as impermeable going out as it is coming in !! You stop goods from coming in, foreigners stop your goods from going out !!
Perhaps your economics 101 course is one of those dumbed down by the government !!
Most others here seemed to have attended the best school of all - The School of Hard Knocks !!
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The Bank of England's Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 1.5 percentage points to 3%.
Well that's clear then. The bank rate isn't the rate at which banks borrow from the BOE its the rate the BOE pays the Banks. And we all know the banks ain't got any dosh at the moment to deposit. Nor are the banks lending to each other. Its pretty plain who's short of deposits - but are there any British Banks with cash to lend to other British Banks? I suspect not - so the LIBOR rate is probably the result of funds from overseas and shows the perceived risk of the UK.
Now that the balmy days of cheap credit are gone it will important for people to realise that credit will be more expensive in the future, and that those who present the most risk will pay the highest price for credit.
While this might have been the case in the past its clear that the additional risk premiums were insufficient. People who want to borrow need to adjust quickly to the new realities, while those with savings need to be adequately rewarded for making their funds available. Given the lack of cheap overseas credit our British Savers will likely enough be in great demand!
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Who benefits from the B.O.E cut? As far as I understand, problems faced by borrowers have been due more to lack of credit availbility than high rates - which have not been exceptional. As savers are likely to suffer, and borrowers unlikely to see significant savings, er hum - could it possibily be the banks who will be the major beneficiaries?
UK Icelandic savers were estimated to have something like £4bn deposits - what are total UK savers deposts worth? Anyone up for a UK savers strike?
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I must take issue with your comment about who benefits Mr Peston. "hard pressed businesses are unlikely to benefit".
Most business borrowings are lent against Base Rate - so they will benefit from today by the full amount.
However, if banks are still obtaining their funding against LIBOR which still runs far ahead of Base, then whilst the consumer benefits, the Banks continue to suffer.
Homeowners may benefit from a fall in Base - however it would be nice if you could add some comment about this rather than the usual media slant which suggests Banks are profiteering from not passing on base rate falls.
It is not suprising that given the slant portrayed that ill informed comments about "greedy banks" are being posted on this thread.
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I simply do not believe that any bank would pay 7% interest after this rate cut. I've contacted the HO of my bank who have said "ridiculous unless it's a small bank about to go under, it's not necessary".
More details for all of us please?
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I'm sure someone will correct me if I'm wrong, but:
deflation - a reduction in business activity resulting in lower levels of output and investment.
inflation - a reduction in the purchasing power of a currency.
So, although several people here seem to suggest that deflation is when the inflation rate goes negative, that really isn't the case.
In fact you can probably have both at once and I suspect that is where the current Brown/Darling social experiment is taking us all.
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ok robert perhaps you could spell out in your next post who exactly a rate cut helps...not the 50% of people on fixed rate mortgages, not the millions of savers, not the small businessman as the banks refuse to pass on the cut. just how does a rate cut "stimulate" the economy? It was not high interest rates that created this mess so how will low interest rates help after all rates in US are 2% and that didnt help. put the rates up!!... savers have suffered too long from below real inflation returns, put the rates up and savers will start to spend the interest....now that will stimulate the economy!
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#195 Wow !! Someone has found a mouse dumb enough to want to tie the bell around the cat's neck !!
And what will the EU commission for competition say about the postal services and banking ??
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If you legislate on interest rates, banks simply will not lend where there is any risk.
The interest rate is set in a market and normally the BoE influences this market by providing a tranche of money at the rate it decrees. However in these circumstances the BoE and market are so out of step that its low interest tranche will sell out quickly and be sold on at a profit by those lucky enough to get their hands on it.
The BoE, while still independent, is influenced by public opinion. It knows it cannot lower the market rate, but if it does not make the attempt then it will be criticised.
In future, there needs to be a lower limit for interest rates of inflation plus say 1%. This inflation rate needs to include house prices and should be independently evaluated. This should prevent future bubbles which is the cause of this crisis.
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REMEMBER THOSE RIDICULOUS BUDGET SPEECHES BROWN USED TO GIVE IN DOUBLE DUTCH,WHICH THE ECONOMIC PUNDITS ALL USED TO PRETEND THEY UNDERSTOOD HIS VERBAL GARBAGE.
ITS EVIDENT WEVE ALL BEEN TAKEN IN, WELL MOST OF US.
SO NOW WE ALL PAY THE PRICE, COOKED BOOKS ALL ROUND.
I'M DOING A NEW LINE IN WHEEL BARROWS TO CARRY THE MONEY TO THE SUPERMARKET.
WILL WE GET LIKE PRE 1939 GERMANY I WONDER?OR MAYBE ZIMBABWE ?
Alexander Curzon.
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Quote:"So far as I can see, the only people to benefit from this rate cut are the irresponsible borrowers who contributed to the problem in the first place.
There's absolutely nothing in it for anybody who's been prudent..."
--------------------------------------------------
It's very patronising to lump everyone into the either the losing and prudent or the winning and irresponsible camps.
I have a tracker mortgage that I can well afford the base replayments on. I then overpay into the account, using these 'savings' to reduce my mortgage debt and allow me to repay my mortgage early. The rate reduction allows me to save more each month and pay it off even earlier (similar to #135).
I've been prudent and this cut helps me. Maybe it will encourage me to spend more on the high street this Christmas?
I've sympathy for those who only have savings and no debts, but it's a complex mix out there and far to simplistic to categorise everyone in this way.
Of course in 5 years time when I've paid off my mortgage early I'll need to worry about what to do with my earnings, but at least I can worry about it then and not now.
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Why can't banks pass rate savings on?
Remember in their good old Fractional Reserve Banking model, they do not have deposits to cover loans out. For every £1 in they lend it out 10 to 20 times or more.
Dropping loan rate margins to all 20 "customers" will affect the fundamental business model they have for getting all 20 to repay their debt at some stage.
Whilst we may be struggling to repay one loan or mortgage, these dimwits have lent £1 out 20 times, and the odds are increasing daily that 3, 4 or 5 of these will not be able to pay, opening a monster cash hole.
Don't criticise 80-100% consumer Loan to Values, when these boys are way above 1000%.
The chickens haven't even set of for the roost yet.
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@169 johnboy101
I didn't say that I was a taxpayer.
For all you know, I could be living in one of our tax havens, and well able to be paid 3.5% tax free for taking out a mortgage.
Your scenario illustrates the extent of the collaboration between the banks and the government, and how well it suits them both to keep us in poverty and discourage us from saving or exhibiting enterprise of any kind.
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The truth is that we have had 20 years of Finance and Credit in our society, we are even a "Service Provider" Country these days, not manufacturing or industry, those days are long long gone.
This country relies on its peoples buying goods on credit, without this facility our economy would not have grown as it has.
The days when people saved for the items they wished to buy are only a memory to those over 40.
Blaming people for believing that Banks were safe, stable and run efficiently doesnt help households who are now unable to get credit to help manage their debts, unable to remortgage, and seeing their lifes being ruined by this credit crunch.
For homeowners with heavy debts, this interest rate cut is their only hope of managing their finances, and to hear that banks wish to 'hoard capital against potential reposessions' is frankly frightening.
THERE WONT BE AS MANY REPOSESSIONS IF THEY PASS ON THE RATE CUTS!!!
Dont they realise that morally they should pass on this cut asap. They have a duty to the people that rely on finance (as the banks have aggressively marketed in the past 20 years).
What is the point of a family losing its home due to being unable to get finance to clear their credit cards, when they have plenty of equity in their property?
Of course, this family cant sell their property right now, because no-one can get a mortgage to buy it!!!
So we let their home goto auction and sell for a fraction, the family ruined, the kids futures effected, what for??? this is preventable....
Talk about a vicious circle!!!
The Government should DEMAND of those banks that accept their intervention (and tax payers money) that the mortgage products they offer match their offerings of Jan 2007 until 2010.
Give homeowners a chance to survive this!!
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UK borrowers/lenders and house buyers would do well to take a leaf out of Germany's book.
Admittedly, prices there have not increased since 1990 (mainly for other reasons like unification). Fixed rate mortgages are the norm. Set your term, set how much you want to pay off each month and away you go. You know your outgoings for the next 10,15,20 years. No attractive rates for the first few years. Banks compete on the fixed rate - nothing else - and that by definition is fixed for the term of the loan.
And once you have a fixed rate mortgage you can actually plan your finances on more than just hope.
Reams of paperwork to get through - none of this self- certification nonsense.
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I don't understand this attitude of 'what about the savers' as if savers were somehow angelic beings and borrowers were all profligate fools.
I bought my first house earlier this year. I bought it because I needed somewhere to live, not as an investment, so falling house prices are not a desperate concern - and in any event, I used the state of the market to gain a significant discount so at the moment the current falls in house prices are already factored in as far as I'm concerned.
I waited so (comparatively) long to buy because I waited until I had a 10% deposit - which seemed reasonable - and a mortgage of only 2.5 times salary.
I also anticipated the economy was going to fail in the short term, and interest rates were more likely to fall than rise, so negotiated a base rate + 0.5% tracker after comparing many, many providers; I did this with the plan though that I would still be able to afford the payments if my bets were wrong and rates rose.
So, obviously, I'm delighted. I don't consider myself to be an 'irresponsible borrower' being 'propped up' - I consider myself to be a prudent manager of my finances being rewarded for making the right judgement of the market.
So please, a little less of the holier-than-thou.
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banks lend out some 20 times the amount they have on deposit, correct? So if someone deposits £1000 at 7 percent, it will cost the banks £70. But the bank will lend out £20,000 on the basis of this, for which they charge (at about 7 per cent as well) £1400 interest. Profit of £1370. Why don't they a) charge less to borrowers b) give more to savers and c) how on earth, given all this, do they manage to make such an unbelievable hash of things?
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@213 meldrewreborn
The Committee has revised down its projected outlook for inflation which, at prevailing market interest rates, contains a substantial risk of undershooting the inflation target. At its November meeting, the Committee therefore judged that a significant reduction in Bank Rate was necessary now in order to meet the 2% target for CPI inflation in the medium term, and accordingly lowered Bank Rate by 1.5 percentage points to 3.0%.
So there you are, the Bank Rate was reduced to cut the risk of inflation going below 2%.
We should be so lucky!
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217- Deflation is by definition what happens when "inflation goes negative". I'd love to know where you got your alternative definition from..
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I'm even more confused. Why would someone with several hundred million pounds need to call a BBC journalist who enjoys sensational reporting? Or are you making the call up? Hmmm.
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Come on Robert, you know that you are mixing up several things here. Base rate cuts are base rate cuts - much else determines the demand for and supply of saving and investment. (Mr Keynes, again, is helpful here - useful chap isn't he?) The demand for deposits is affected, yes, by risk, but also by the availability of returns on borrowed deposit cash (including the avaikavility of inter-bank lending opportunities), international market conditions and, no doubt, much else.
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I've just shown your blog to a colleague of mine who has never read one of you're incisive articles before. She shook her head several times. I was awaiting a critical comment but all she said was "doesnt he love himself". It made me laugh. Sorry - had to report it!
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Twelve years ago I was heavy in debt. I realised that the matter couldn't go on. I scrimped and saved. I paid off my credit cards and even my mortgage. I've built up an almost reasonable pot for my pension. I have some general savings. What a mug!
My savings will now grow at below the rate of inflation. What advances they make will be further eroded by being taxed by this apology of a government. If I lose my job, I'll be made to pauper myself before I can draw any benefit. I had hoped to retire in two years time. Forget it. I'll be lucky if I can afford it in seven.
But don't worry the bank directors and their cronies are being feather bedded by the rest of us. If anyone fancies storming the Bastile of the City of London .. count me in. I've got nothing to lose.
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re #228 (boonery)
I think the problem is that you lend out £20,000 when you only have £1,000, and find that only £16,000 gets paid back to you're in trouble.
To overcome this flaw, some bank then invented Credit Default Swaps ... and all the other bansk blindly bought into it (since they saw the opportunity to swell their bonus checks, rather than the bigger picture.)
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Robert, you have stumbled upon the true market price of credit. It is roughly where many people thought it was all along. Depositors in the high street, why accept less?
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Does not the fact of the 7% return that your friend is being offered confirm that Brown and Darlings rescue is patently not going to work.
If the banks continue to pursue this course they will plunge us into a depression because it is patently obvious that we are heading towards stagflation.
Have they not learnt from what happened in Japan, or am I crediting senior bank staff with too much intelligence!!
Although I would never have thought I would say this, are we not getting to the stage where full bank nationisation is going to have to be considered for all UK banks.
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To comment number 1, the reason banks pay a lower rate of interest than individuals is because it's more risky to lend to individuals than banks. I know this may seem a little disputable at the moment, but no UK saver has lost a penny of their savings (yet!) but many individuals have defaulted on their debt.
This is the reason that the full 1.5% cut in interest rates will not get passed on to individuals and it would be irresponsible for banks to pass this on. A large part of the reason we are in this mess is that previously they lent too freely. Banks have learned from this mistake (as they should do) and have now factored in the risk of lending into interest rates better than had been doing previously. People can't honestly have thought the previous lending boom wasn't going to end in tears can they?!
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Clearly the banks don't give a flying monkeys about the plight of the tax payers who have bailed them out in the first place.What happened to competition, surely you'd think that at least one of the banks would pass the full discount of 1.5 %, smells of cartel. We were told how important banks are to the economy when we bailed them out. Its a little ironic that they are now becoming the problem yet again. Emperors new clothing thats all they are.
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Ok, so we can now borrow 100k at say 4%
and then save that 100k at say 7%.
how can this be?
Welcome to the world of Fractional Reserve Banking.
Look at Emperor Brown over there, he isnt wearing any clothes.
ha ha , lucky the sheople are blind.
For all those saying spending got us in this mess, how can it get us out?
Well this is the solution and the problem. With FRB.
We run out of people to give credit too. We tried to keep it going by throwing credit cards at you, this worked for a while, so then we increaced immigration (more people to throw credit at) but they didnt borrow much, so that didnt work to well. So now the music has stopped and there is not enough chairs. So we have huge debts and contraction in the monetry supply (no more credit)
We Need Masses of credit to prop up all this credit. - if this sounds mad, well actually its insane.
All those with there eyes open know that inflation is now the only way forward.
those poor savers aint just gonna lose on the intrest rate.
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#230
I googled: deflation meaning
using the pages from the UK option.
The first reference gives pretty much this as the "Econ" meaning and ascribes it to Collins Essential English Dictionary 2nd Edition 2006.
Others are similar but some call it a decrease in the money supply - still not really the opposite of inflation.
Where has your "definition" come from?
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Dear me only 7% on offer for all those millions!
Try Poland you'd get minimum 10% without even trying. Ah but then you might also get a blast from Iceland, Hungary, Ukraine, Latvia Zzzzzzz
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Lloyds TSB is getting great publicity from stating that it would pass on the full rate cut in its SVR. However, in all of the coverage, I have not seen any mention of the large discrepancies between major banks' SVRs.
For example, Lloyds TSB's SVR is now 5%, down from 6.5%. Prior to today's rate cut, the SVR at firstdirect (part of HSBC) was 5.5% (no announcement yet from them).
So we end up with a situation in which firstdirect could cut their SVR to 4.5% (less than Lloyds TSB) and perhaps be pilloried for failing to pass on the whole rate cut!
Why is no one examining this large spread of SVRs among major banks? What accounts for it?
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I have been thinking about moving savings outside the UK for a while because of the situation, I don?t trust the banks anymore to look after my money.
Now this interest rate cut is making the prospect of moving my savings to more economically stable higher interest rate countries a tempting priority.
Its by no means a massive amount modest enough to buy a house if the prices drop another 10% to 20%, I have worked and saved hard to pull it together and I wont see it flushed down the pan due that lot.
Gordon take note forget trying to resurrect a now failed untrusted system, its time for a change of direction
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When interest rates are going down at such an alarming rate, I wonder what will happen to Premium Bonds!!. The government pays in prizes an amount that is relative to the Bank Rate. Will a lot of people withdraw their money therefore leaving the government out of pocket?.
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Sung in the style of football fans across the UK!
Still no cash, still no cash, still no cash
ooh aah!
Still no cash, still no cash, still no cash
Still no cash, still no cash, still no cash
Still no cash, still no cash
You know the next 5 verses!
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The longer the lack of liqudity, the longer the recession. The banks are now making things worse by hoarding taxpayers bailout money. Personally, that sticks in my throat!
For every month without cash, add two to the recovery from recession - so by my count - 2 years before we see the bottom of this cycle, let alone reach it. Not only have the banks failed their own shareholders, but their herd mentality threatens to sink the country.
For Estate Agents, and Insurance Salesmen, now read Bankers, in the same murky light!
As for house prices, until people can borrow money and afford the repayments on sensible multiples of salary, then wait years for a return to 2007 house prices.
As for businesses, just pray you survive the next 2 years. I see nothing but insolvencies of small and not so small companies starting on Xmas Eve 2008 - a well known day to bury companies.
Unenmployment 3 million in a year's time. Base Rate - nearing 1.5% by then too!
National Debt - 60% of GDP as more financial companies totter and tax revenues fall. The money is needed to pay for all those pubilc works this Government is promising...oh and I almost forgot, all those new benefit claimants.
Forgive the cynicism, but this is the real world.
Remember where you read these gloomy predictions. I do not have access to the mandarins et al within the confines of Westminster. I just see and hear what is going on around us all.
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Why doesn't the UK government by-pass the clearing banks by setting up an arm's length agency(ies) to provide mortgages and business loans at rates closer to the Bank Rate? OK, so Fannie Mae and Freddie Mac got a bit too arm's length, but tighter control on investment rules (don't invest in structured products you don't understand) should prevent this.
In honour of our former Iron Chancellor, we could name this new lending/broking agency 'Gordo B' or - more appropriately, perhaps - 'Gordon Bennett.'
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#241 croydo .. I have to say I am with haufdeed.... inflating a balloon is when someone pumps in air...deflating a balloon is when someone lets out the air....
It's the same with bubbles for inflating... except bubbles are more difficult than balloons to deflate gently...and usually just pop without warning.
Maybe this proves that we haven't actually had a classic inflationary bubble (as it hasn't popped suddenly--despite trying it's best to do just that a few weeks ago) instead it's been an inflationary balloon these last few years ...which is now deflating ...
Inflation and deflation in the cash value of assets, and inflation and deflation in the business activity thereby caused , or causing each other.
The definition problem isn't in the terms themselves ...it's just in the application to different specific examples... a noun/adjective thing.
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Sorry - third rant in quick succession.
There is some light in today's market. If you are in debt, then basically, repay now. There is a contraction in the system that means people save more in tougher times, so instead of saving at paltry rates, repay more expensive debt. Strangely enough, this will naturally contract the banking system, and improve M3 money supply.
Mortgages for most should be cheaper. Use the saving to pay off credit cards and other personal debt or pay off the mortgage faster by keeping the same monthly payments going.
That way, the banks will then recover cash, and eventually, that will tip them into lending again. After all, a bank that does not lend its deposits is a bank that eventually goes bust! It has to lend in order to trade and survive.
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#244 sorry to post immediately ...but re Lloyds TSB am I the only one wondering (cynically...I know!) that Lloyds TSB may be teachers pet in this because...in a reversal of the usual transactional relationship.....
Teacher has a great big, juicy apple for them ....if they help teacher this one time and set a good example to their classmates....
Nah!...that's too cynical even for me......
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Robert,
Today?s cut in MLR and the reaction of the big lenders seems to indicate that the current crisis is by no means over.
There seems to be a conventional wisdom that banks need to lend to each other. Indeed their current unwillingness to do so seems to be regarded as the biggest problem in the current crisis.
But why? Surely banks have resources to lend? That?s their business ? taking money in from depositors and lending it to people who need it to do something useful with it. Why, then, should they lend money to other banks rather than to more constructive parts of the economy?
This might be obvious to bankers and to business correspondents but it might not be obvious to others. Or, perhaps, I?m just being dim. However, I was taught that the only stupid question was the one you didn?t ask!
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#249 Okay e2toe4.
I go along with what you're saying, that the term needs qualification.
If we're talking price deflation, nobody is suggesting that the petrol price going down is a bad thing. Nobody is suggesting that falling prices of high quality manufactured goods from the far east is a bad thing (except for local producers).
When people talk about deflation being bad, it's because of the contraction in the economy - falling output, reducing workforce, reducing pay packets and that is the contraction (deflation) of the economy, rather than price deflation.
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I agree with you totally.
There is a credibility problem
There are other problems too
For savers --- why bother to save and act responsibly, if other peoples' excesses mean they are rewarded? Also, savings in real terms will be even more negative!
For teachers -- how to justify substantial rate cuts even though inflation is 5.2% vs 2.0% target?
How can the 200 bps cuts in the past 2 months square with a budget deficit black hole in the UK and elsewhere?
Fed research that regular interest rate changes are more successful than just 1 large rate cut
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MLR down? Winners are:
Anyone with a loan linked to base rate (does this include the bailout funds?)
Landlords (renting becomes people's only option when they lose their houses)
House builders-they need to build council properties very quickly or we will have tent cities like the USA
Exports
Losers are:
Anyone with a fixed rate loan
Anyone with savings
Sterling on the currency markets (euro here we come)
B of E - totally redundant once we have the Euro as our currency
Imports
Result on economy-
No 'tracker loans'
Increasing food and energy costs therefore fixed rate mortgagees will not be spending money.
Majority of us unable to change mortgage or get loans
Savings vanish abroad
No foreign investment
Exponential increase in repossessions and bankruptcies
Exponential increase in divorce, domestic violence suicides and deaths of the elderly unable to keep warm and eat properly
Exponential increase in unemployment
Cash rich banks with no savers, credit defaults and noone to lend to (very few will be left with 25% equity by now
Exponential increase in state benefit claimants
A rate increase would stabilise sterling by attracting investments, but would be hard on the minority holding base rate linked loans.
What should happen is:
A rate increase
Raising of lower and middle tax bands
Reintroduction of MIRAS (I had almost forgotten that term!)
Cap credit card interest and ban them
Forcing of lenders to extend terms and this reduce repayments
Tax and NI holiday (at the very least a significant reduction) for employers
The money loaned to the banks withdrawn and given to all people and companies in work as a tax rebate
Capping of all energy charges or a windfall tax if charges aren't returned to last year's prices
A reduction in petrol taxes and car tax ( for 1.8 litre engines or less)
A clearing of credit history older than 2 years
Immediate prosecution of all bankers and politicians responsible for this mess
Instant return to sensible mortgage lending
Decent pay awards for nurses, teachers, police, fire brigades,security services
Removal of massive perks and bonuses for obscene salaries and politicians-best done by big taxation
Big taxes for those investing overseas
Immediate return to UK based call centres and manufacturing (tax incentives would be good)
Mmmm-sorry if I sound a bit like am ad for Mr Obama-but, as usual, most of the people in this country will not benefit from a drop in minimum lending rate. A rate cut or a rate rise is useless without a raft of other measures at the same time-and who in their right mind would buy a property at the moment as prices are still going down?!
House prices need to come down even further to a level people can afford. First time buyers will get the housing market moving again when they can get mortgages and have saved a deposit.
I'm no expert, but there are enough of us on this blog that prove that we apparently know more about sorting this mess than the so called professionals, prime minister and treasury secretary!
PS. and guess what? The IMF has been bad mouthing and spanking the UK again-how irresponsible is that? HOW DARE THEY cause a further run on our currency?
We will see a massive increase in redundancies just before Christmas (always seems to be a popular time to lay off staff).
Leave the interest rate alone, get the bail put funds back and give everyone the 16k the rebate equated to-at least we'd be able to have a decent meal on the table, warm homes and happy Christmas!
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oops! Forgot to also include we should have house prices included on inflation figures...
Also forgot a mandatory transparency order to all financial institutions-full public disclosure
Perhaps GB should get a summarised list from bloggers-far more ideas which will work on here than he seems able to think of or implement!
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Today is the day the Bank of England came of age,YES,13 years from the loss of its Barings after being public castigated .
Today a bar mitzvah [allelulia] where cuts had to be made to show the gulliblayesed whirled THAT we're made of steely stuff and stiff upper lip
Today ,If it had not been for the Gordon Brown /William Caxton type partnerrship /civil union then Britains BOE would have followed its Barings into the AAAbysS HOPING THINGS COULD ONLY GET BARTER
Today the independant BOE attains manhood after painful cuts, but i say why stop there ,cut back to the bone and celebrate woe manhood aswell,the resulting $exchange could be exported to China which has a yin shortage and" hey Presto "things will only get beterr"and it will help keep their population down .
And its about time the Chinese gave us back our pictures of the Queen and completed their collection of green dead MULTI DENOMINATIONAL, in God we trust everyone else pays cash,U$A pre$idents
Should they be fortunate enough to aquire a complete $et rest aaasured that they will be pricele$$ [worth absolutely nothing ]
Today i have a dream that one day the first black American president will one day be green aswell and exported to China
Let freedom ring across the $ debt empire let it shine forth from the pinacle of brokebuck mountain, drawing with true love its friends romans and country men [to lend its arrears]only like moths to drop exhausted smashed against its Northern Rocks
Tomorrow i will have another dream ,that USA will have the first fully Green president
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179,
You think you've somehow EARNED this? Puh-LEASE! You overstretched yourself and made what would have been an idiotic decision in a free market, and now the government is trying to bail you out because there are loads of you. If it were a case of one individual fool, you'd be allowed to go to the wall, and rightly so. Unfortunately there's safety in numbers.
You talk about yourself as though you took a noble risk with the promise of positive externalities, like starting a new business, or engaging in research. But you want a pat on the back for buying at 7x income and following the herd blindly? (Looks contemptuous.) You deserve to go bust and be repossessed. Seriously. Free markets only work properly when people are punished for making foolish decisions. If you bail them out, the economy breaks down, as there is no clear link between smartness and effort on the one hand and reward on the other. We might as well have a lottery to decide people's level of wealth. Would probably be beneficial for fools and wastrels, but terrible for the economy as a whole.
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The rate cut should have been made last year at this time.
Unfortunately the academics in the BOE don't know what real life is about and as a result they have shut the door after the horse has bolted. No vision!
Rates will fall to 1% or even zero by June 09 so best get it over with next month.
The credit card companies are owned by the banks and contribute to their massive profits because they use money lenders rates of 18% to 30% plus.
This should be reduced to 3% over base immediately and indeed any bank lending more than 3 over base should be taxed 95% on ALL profits and their directors should be taxed 95% too.
That would sort out the "dilemma" of the charlatons not passing on interest reductions.
As for Supertax we should apply this to gas, water and communication companies too.
What are the banks going to do with the million or so houses that are going to be taken over and sold cheaply next year?
Every month the prices will just go down, loweing the market even more. The banks will not recover their money and HM gov. will have to pay millions out on benefits to rehouse people whilst thousands of houses lie empty in the country.
Obviously no one has thought this mess through yet.
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The government should take the lead by cutting the 12% coupon by 150 basis points, on its proposed preference shares in the banks.
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Well... I was gobsmacked and delighted at the base rate cut. I have been on a tracker rate (base rate + 1.29) since May this year, which runs for two years. So I will get the full cut passed on next month. I read somewhere that 40% of mortgage holders are on tracker deals, so despite the doom mongering of some of the newspapers, a lot of people (nearly half of homeowners) will benefit from the base rate cut(s). eventually fixed rates will drop too - I noticed the money market rates falling substantially yesterday.
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interesting that loans linked to base rate have been rapidly withdrawn-they will reappear as interest rates rise and fixed rates will disappear! The banks will only supply the products they expect to get the most from!
Once again, the banks are a law into themselves!
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Tracker mortgages will be replaced with racker rigourmortgages which will stretch the borrowerrs to infinity and beyond ,soon to be known also as twizzle mortgages
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The cry went up pretty quickly to pass the rate cut on to the poor suffering consumers.
Who actually benefits though?
If we look at it depositors are totally st****d! Prudence counts for nothing as usual.
Those with motgages will get a few months assistance, but rates can't Stay low as that debt has to be paid back sometime.
Mortgages get cheaper! -- Hmmm , I think I've seen this one before somewhere.
combine this with what we would hope to be the use of sensible loans then new motgagees won't be able to afford anything anyway. So the housing market won't go out of control again - Thank god.
Getting the economy moving - exactly how's that going to be achieved. I don't see the banks rushing to drop credit card interest rates. It strikes me most people are still paying for last Xmas. So I don't think the recovery will be consumer led.
Surely small business will benefit. In your dreams this government and it's predecessor make noise but do nothing - except get rich. Mp's salaries and pension have kept well ahead of inflation etc. I've decided this should be called the "Mandelson Syndrome"
regards DCH
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Dear Mr. Peston
I believe I have an answer to whom benefits from the rate cut. I apologise for the late response to your blog...
My belief is that we all benefit from the rate cut because the government will benefit hugely!
The yield demanded for government bonds is linked to the interest rate. Therefore a lowering of interest rates will lead to a lower opportunity cost for the government borrowing that needs to be undertaken
a) as a fiscal stimulus
b) to back banks
Secondly banks, will be able to increase their profit margins, helping recapitalise, without deleveraging. This in turn leads to a healthier financial market. Perhaps the government will have to buy less of our banks as they become more profitable, again reducing the cost to the tax payer.
On the negative I suppose it will lead to a reduction in the pound, reducing capital inflows as our current account deficit decreases...but our current account deficit would be decreasing! The devaluation is much needed, and would also lead to a demand stimulus.
In response to your claim that the bank has some explaining to do...I agree, to a point.
I believe the banks have done what Keynes once suggested he himself did. Change his mind when the facts change. I agree because the facts shouldn't have changed...forecasts should have been better. But that has been the same with all forecasters and has more to do with the way we predict future events than the way the bank of england responded.
Yours Sincerely
William D
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Well I was right. Alliance and Leicester gave us a derisory 0.25% rate cut, that's 1/4%, having not made any reduction for the last two Bank of England Interest Rate cuts.
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Rate Cut, what rate cut!!!
I am with RBS one account and 1.5 % reduction did not make any difference to my rate. Top management is apperently thinking about it.
All that talk about the banks passing the rate cut to customers is just for news bulletins.
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I have noticed that Abbey and Bradford and Bingley have both reduced there rates by the full 1.5 percent these are both owned by Santander. Can anyone tell me if the Alliance and Leicester has also reduced there rate by the same amount?
Are they not also owned bt Santander.
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Great write-ups Robert, keep up the good work!
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