Thursday, February 05, 2009

Help Needed

I have confessed before that my grasp of economics is not the sharpest, though I do feel I understand as much as the next lay person.

I am struggling to understand why the Bank of England has today announced a further cut in the base rate from 1.5% to 1%.

I understand that rate cuts are some times used as a tool to combat inflation, but there are large areas of the economy where prices are coming down, rather than up. I have not seen a report in the press that shows that Inflation is the greatest concern here.

A further rate cut can only punish savers whose rates will be cut instantly. Yet previous rate cuts have not been passed along in full to borrowers, this one probably will not be passed on in full either. The Bank of England, possibly at the Governments urging seems to be drastically trying to help those who have borrowed more than they can afford to repay; but it is doing so at the cost of the people who have been responsible and saved, many of whom have spent their lives paying off mortgages and are now trying to put money aside for themselves.

I am not suggesting that borrowers should not be helped, they should. But, isn't there a danger in helping too generously, those who have borrowed too much, some (by no means all) of whom have been reckless in the levels of debt they have undertaken. Where is the incentive for foreign investors and corporations to bring their cash to the UK? Why should thousands of ex-pats, living cheaply abroad in places like Spain leave their money in UK PLC when they can earn more interest on those savings abroad?

The line I am hearing is that the Government wants the banks lending to each other again. This seems a little dangerous to me, as that lending is based on the UK banks borrowing more. Surely, they banks need to be able to offer incentives for people to put their money in their banks or building societies and use that cash on providing loans at a higher interest than they are paying the saver. Why would a saver want to put their capital in the bank with such unattractive rates?

Anyway, like I say, economics are not my strong point, so feel free to point out if and where I am wrong... but if you do, please use language I can understand.


robertr123 said...

Interest cuts are pointless and, in my opinion, only intended to punish savers. Lots of coverage around the fact that most lenders will not reduce their interest rates below their own, self-imposed 3% floor - so anything less is ridiculous. No gain for borrowers, no gain for savers.

The only other reason i can think is because this will reduce LIBOR -but the banks are awash with cash now, so this doesnt answer the LIBOR line of attack - they are too scared to lend money. Its protectionism proper. Someone is waiting to see who will go first. Brown was right - this IS depression.

Anonymous said...

I know even less about economics but at the moment I am tending towards the view that they are silly idiots that dont know any better. Or maybe Gordon Brown made them do it.