The Bank of England has reduced interest rates to a record low of 1% from 1.5% in an attempt to boost the shrinking economy. This marks the fifth interest rate cut since October, as the Bank seeks to encourage more lending. However, there are concerns that savers will be hurt by lower interest rates. And business groups argue that this rate reduction will not be enough to ease the economic crisis, and will not encourage banks to lend. (See the concerns of the NIESR in yesterday's blog). Link to BBC NewsGeoff Riley provides a good summary of the decision and a comprehensive chart-based student handout. Link
8 comments:
To be honest I dont believe that a cut in the base rate will be successful in reviving any sort of consumer confidence and stimulate spending. The continuous cuts only reduce the amount of savings that are being made which greatly effect the elderly who rely on their savings to pay for basic conumer goods. If the banks keep cutting the rate, then both savers and spenders will withhold because they physically dont have the money too spend. Monetary policy is fast becoming a blunt instrument in tackling the recession where as the fiscal policy is perfect in targeting specific groups of consumers.
Some good points Kyle...although perhaps one thing they want to stimulate is in fact borrowing, as many people who feel they need a loan will have more confidence that they can pay it off with just a 1% rate on it, and this hopefully will filter through confidence to more people to start borrowing and spending money. Whether this money actually exists however is a point to bear in mind...
The whole issue of sub-prime lending led to the current crisis today, so I find it hard to agree, Sam, that borrowing is the priority at the moment, where banks have even less capital or assets than before. I rather agree with Kyle, fiscal is definitley the way forward. The base rate has seen successive cuts already and it has had no real impact on the markets. A fiscal stimulus however is perfectly designed to better the core structure of the economy and so entice consumers back with the government leading the way.
i agree with you Sam that the cut in the base rates does mean that an indivdual is more likely to take out a loan from a bank but I do fell with the current economic situation that most people do not have the confidence that they will be able to keep their jobs, which causes doubt whether they could even pay back the amount that they owe never mind having to pay interest on that amount. Of course there are positive's and negative's with the base rate cut but I fell that the negative's strongely out way the positive's
Pretty much agreed...
Agreed Kyle :)
I think it will increase consumer spending, however not by a substancial amount. However, it will not encourage private firms to spend money as they won't have enough confidence. They may well believe it will be beneficial to save rather than to spend.
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