Thursday, December 04, 2008

The Bank of England's pointless interest rate cut

Many people have been calling for the Bank of England to cut interest rates, even after last months massive shocker of a 1.5% cut which I said was pointless when it happened.

Well, they have done it again, and cut interest rates by 1% to an all time low of 2% which has not been seen for 57 years. If it goes any lower it will be lower than since the creation of the bank.

It seems some people think that what the Bank of England does on interest rates is relevant.

It isn't. Not even a little bit.

If you don't believe me try lending money to a bank, offering good terms for how long they keep it, and see how much they are prepared to pay. You will find that it is considerably more than 2%, or even 3%. In fact it is more likely to be at the range of 4.5% to 6%.

It is also clear that the Bank of England has absolutely no intention of lending money to banks at 2% either, so where is this money going to come from?

It should be noted that UK lending institutions have since 2001 lent £700 billion more than they have in domestic deposits. Non domestic lenders must think we are mad if we think they are going to buy a rapidly devaluing pound with high inflation to lend at a very low rate which will see their original capital devalued. In essence we are asking for people to give us money on a non commercial basis.

What is more savers are being savaged.

Here is a thought, going against just about every other commentator.

Put interest rates up, so that people are prepared to lend to inflation + 1%.

I know lots of people will howl, but the problem we have right now is less that banks are charging lots for money, and far more that they just do not have the money to lend, especially as lenders can get a far better rate lending to our government which is about to swallow a massive amount of cash.

The BBC has this

1 comment:

Anonymous said...

All these problems can be tracked back to 19th century, when free banking was lost forever. Modern central banks are following short term political demands and still, they are often not able to achieve at least short term goals. If you fix interest rate with inflation, it may help, on the other hand, I think soon there will be some ways how to "cheat" with measuring inflation. Because interest rate is powerful tool in hands of central bankers and they will not be willing to lose it...