Friday, January 09, 2009

Counter productive interest rate cut.

The Bank of England has cut its base rate of interest to the lowest in history.

This is of course entirely ridiculous, and they ought to be ashamed of themselves.

The Bank of England lost the ability to control interest rates in the market place months ago as a result of the credit crunch. It can set its base rate to what it likes, no body is taking any any notice.

In order to cure a problem, you need to start with the correct diagnosis. This clearly has not been done.

The problem that ails the economy is not the cost of money (or lending) but its availability. You could set interest rates to what ever you like that in principle, is not going to do anything to fix the problem. In fact if you set them too low it will (and is) making the problem worse, or in this case, much worse.

The problem we have is that there is far less on deposit from savers in this country then there is currently out in loans. Our banks do not have the access to money to lend. That is the long and the short of the problem.

All cutting interest rates will do is make it less attractive to lend into this economy.

It gets worse. (No, really, it does). Whilst all those on trackers, without collars, or those who have not yet had them applied are getting cheaper money on existing loans, as in their repayments are less (the equivalent of a tax cut for them, 4.5 million people) those trying to get new loans are having to pay much higher interest rates if they can get loans at all.

I did hear the economically illiterate Yvette Cooper (Mrs Balls) who is Chief secretary to the Treasury speaking yesterday. She said that the banks ought to pass on the cut as they were getting cheaper money! Where from love? The banks are not even getting Libor rate and are paying very good rates compared to base for savers prepared to make a long term commitment.

So what we need is for the Bank of England to stop trying to fix a problem we do not have (the cost of money according to base rate) and start fixing the problem we do have, which is that no one is prepared to lend to us at very low rates.

The BBC has this.


Alexander Lê said...
This comment has been removed by the author.
Alexander Lê said...

I totally agree, from a US perspective I'd say that monetary was handle quite poorly in 2008, and that the UK is just following suite. I'm not totally sure of the situation in the UK, but in part I think the problem is fear of lending on the banks part. Many banks have increased requirements to getting loans, and making it harder in general for consumers and businesses to get credit. Even with interest rate cuts, part of the problem is sentiment...

Vancouver realtor said...

Oh yes, there is a simple solution! Printing :) Nobody wants to admit we have to simply endure the crisis - there have been lot of landing, now there has to be lot of saving. Instead, officials are furiously pushing the "lower interest rate" buttons on their PC's, trying to restart the economy like some old car's engine in winter...