I'm amazed. The Monetary Policy Committee have cut interest rates in the last few minutes by 1.5% to a new rate of 3%. In doing so they proved two things. First of all, they can ignore their inflation remit. I have no doubt they did. Second, they are not independent. This body was not inclined to make that move. It only did so because it was, I am sure, leaned upon from on high.
That said, this is clearly a move in the right direction. The rate has not gone as far as I want. I argued, for example, when working on the Green New Deal earlier this year that a cut to 2% was desirable, although I admit this did not get in the final report. I continue to hold that opinion, but let's deal with the pragmatic issue of the moment, which is whether this cut will now be passed on to borrowers, or not.
It is obvious that some banks have little intention to do so, including Abbey, which is part of Santander. They put up their mortgage rates earlier this week. I am very worried that many banks will use cuts in base interest rates as an opportunity to boost their profitability, and to rebuild their balance sheets by increasing the differential between the rate at which they borrow and the rate at which they lend.
The government has a mechanism available to it to prevent this. It must force its partially state-owned banks, Lloyds TSB, RBS, HBOS and those whose rescue it engineered - the Alliance and Leicester and Bradford and Bingley, to pass on the full rate cut to their customers. And that should not just be to mortgage customers. The rate cuts should be reflected in bank overdraft rates as well for both businesses and individuals whilst credit card rates must also be subject to serious review.
If banks need more capital it is the job of the markets or government to provide it. This is not the time to overcharge ordinary people to achieve that result by indirect means.
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It is an indication of just how deep the problems are that interest rate policy is being set to encourage organsations and individuals to borrow at a time when debt is at it’s most critical ever and should be being reigned in.
Of course, the debt (including government spending) should have been reigned in during the “good” years but that wouldn’t have fitted in with Gordon’s miracle economy.
I don’t know about Gordon Brown being the worst PM ever, but history will surely show him high in the rankings of worst chancellor ever.
Peter
Lending has very little to do with interest rates if the lender has no funds to advance. That is the current scenario. This change will not create additional credit problems. It is deliberately designed to make sure that those with credit problems can manage them better with out creating further bad debt risk. In that sense this is exactly the right thing to do.
In the longer term if it does create an environment where it is easier for people to invest, and so begin the basis for recovery from recession, all to the good. But that is not the immediate consequence as any economist knows
Richard
Hi Richard,
I’m puzzled how having a really low interest rate is going to encourage people to invest. Surely they’d be more likely to stuff it under the mattress if they’ll get a tiny rate of return from a bank?
Or have I missed something here?
M
To Emily:
Yes, it will encourage people to invest in the stock exchange, and not into debt (fixed deposits, gilts, etc….). Instead of earning less than 3% on your savings account, you invest in stocks. When interest rates go down, the attractiveness of stock exchanges go up.
Otherwise, rates can go down, LIBOR will not go down that much, because everybody forgets the risk factor of lending to people. When I lend my money to a AAA company through a bond, I expect a return higher than that of a gilt because my risk is higher. When I lend money to an individual who hasn’t got deep pockets in a time when the economy is entering into recessions, how do you want me to factor the default risk? By charging way above base.
This whole mortgage discussion is pointless and shortsighted. One of the reasons we are where we are is because banks forgot to factor the lending risks. Now that they are, we want them to ignore that risk for more of the binging same? Get real. The medecine is hard to swallow, but the reduction in rate is not going to trickle down to Mr Joe Bloggs nor should it.
Azra
And as I hope you have noted, you’re already completely wrong
It really is time you people realised economics has changed forever and your wild assumptions about how markets work (which have shown not to be true) are no longer believed
Richard
Lets hope this works as a short term measure and enable a period of calm for restructuring to happen, forced by HMG if needed.
Especially for those consumers/business who were honest & genuinely misled by no more boom or busts, poor regulation and lending controls etc.
Lets not forget what got us where we are? and the longer term potentially ahead.Moribund companies may now persist for a longtime. Especially in the protected areas of the economy.(Not many new banks setting up to compete.)
I think profitable cashpositive companies should be able to ask or be refereed for direct temporary ‘secured HMG funding’ if renewal of facilities are refused by a commercial bank because they need to shrink their balance sheets. Possibly at HMRC rates.
Unfortunately some companies/people just took too many risks and will probably fall insolvent. Slowing the process down may not help in some cases and just prolong the inevitable. I suspect economics have not changed forever, but the chaos is the market trying to correct and close these unprofitable positions.The financial WMD’s once cleared up will allow a period of more sustainable and real growth.
Certainly, we should look to cushion the worst excess of a downturn and protect the vulnerable. But the opposite should have applied in reverse. also. So it appears the MPC is not independent. So it appears our & GB’s fabled economic management was in fact just a good old debt boom.
Politicians how can we get them in a box to prevent them from causing potentially excessive and unknown burdens on the future, without a specific prior electoral mandate?
Hi Richard
This was not a decision made by the banks, it was a decision made by the politicians.
So the rate has gone down, great. How many people will be affected by this? In the UK, a third of the people rent, a third own and a third have mortgages. Out of a third who have mortgages, how many have a tracker? How many have their interest fixed for three years or more? How many have taken 100%? How many are going to benefit from this?
In all cases, interest rates is not the only way to factor the risk. I am not wrong in what I am saying, I am incomplete. Either you charge a higher interest rate, or you ask for a bigger deposit.
How would YOOU factor the lending risk? I would be interested. I cannot believe that you think that the British obsession with interest rates, property owning and Daily Mail campaigns are right.
Do you not think that lending too much money irresponsibly is part of the problem?
By the way, I am writing this on my laptop powered by a linux OS. That means that I do not support a famous Redmond company which has received much criticism on this blog for their corporate practice based out of Ireland. If you ever are serious about what you write, give linux a shot. I would be very happy to send you a CD. By using Microsoft products, you severely contradict yourself, don’t you think?
Azra
Credit and capital controls?
Remember them?
We may need them again.
And yes, too much credit is precisely part of the problem. I agree. But we do not et out of the problem by forcing people into insolvency in the meantime.
Richard