Thursday, 4 December 2008

Slash and Spend?

The Bank of England Monetary Policy Committee has made another bold move by cutting interest rates by one percentage point. This comes on top of the 1.5 percentage point drop last month, bringing the rate down to its lowest level since the Bank was founded over 300 years ago.

But will it work? Well it’ll certainly leave more money in the pocket of many mortgage-holders. It also means that savers have less to gain from leaving their cash in banks, so they may opt to splash out instead, helping retailers and, in turn, manufacturers.

This move by the MPC, which makes decisions on interest rate levels independently but while working towards government targets, is aimed at complementing the recent drop in VAT to the minimum permissible level of 15%. Together the Bank and the Government will hope that increased consumer confidence and higher discretionary income will result in more spending.

It seems sensible to make this move- it’s the simplest way to get more money into the system and unlike the VAT cut, will not create massive debt for the UK. Mortgage lenders, who are already cutting back on the offers they are making to homeowners, may not be too happy. They’re not obliged to pass on the cuts, but with the government buying up a significant interest in several of the highstreet banks and offering unprecedented security backing across the board, the authorities effectively have the lenders over a barrel.

However, problems may arise if the interest rate and VAT cuts fail to have the desired effect on the economy. With both now at rock bottom, there’s nowhere else to go if things continue in a bad vein.

5 comments:

Mick said...

What about savers Gary?

Gary McKeown said...

Mick-

As I mentioned in the piece, this rate cut will be a disincentive for savers to leave their money deposited as they'll earn less interest on it now. Whilst this will sting them, from the point of view of the economy it is effectively dead money if it's sitting in a deposit account. Lowering interest rates will make savers more likely to spend their money, which is presumably what the Bank and the government want.

Anonymous said...

I think Gordon has left a huge black hole in the economy which will come back to hanunt us i 2 to 3 years - the gold reserves have been depleted, the Govt has spent a huge amount of money propping up the greedy banks - what happened all their profits over the years - did they not keep any back for a riny day? - so I think the doom and gloom in the economy is going to get much worse and deeper!

Anonymous said...

I hope Brown's Keynesian economics work!

feeling the pinch said...

So do I - or we are looking at a bleak few years