Do interest rate cuts work?

The MPC duly announced the much anticipated cut in base interest rates, though the 0.25% cut was much less than recent cuts by the US Federal Reserve. There is a good piece by Geoff Riley on the tutor2u website explaining the transmission mechanism of monetary policy, in particular the effects of interest rate changes. In addition, the comments in response to the article are worth reading.

http://www.tutor2u.net/blog/index.php/economics/comments/interest-rate-cuts-do-work/#extended

Risk of recession 'low'.

The risk of a recession remains low even though UK economic growth will slow sharply in 2008, a report says. The Ernst & Young ITEM Club, using the Treasury's own model of the economy, expects the economy to expand by 1.8% in 2008 compared with 3.1% last year. It expects interest rates to fall to mitigate the effect of the downturn. One factor in warding off a recession will be investment from cash-rich government controlled funds in Asia and the Middle East, it said.

http://news.bbc.co.uk/1/hi/business/7198702.stm

On the theme of recession, Evan Davis, in his latest blog, considers how to survive an economic slowdown. Should consumers spend or save? He refers to Keynes' 'paradox of thrift' and the significance of the level of savings for the economy.

http://www.bbc.co.uk/blogs/thereporters/evandavis/

Housing slowdown continues

Further evidence of a housing slowdown emerged in December’s FT house index, which showed that house price inflation has slowed from the summer’s double digit rate of growth to its lowest rate this year. Click on the link below to view the FT interactive house price map.

http://www.ft.com/cms/s/2/37c59e28-a21c-11db-a187-0000779e2340.html

Property prices are falling to an extent not seen since the 1990s housing recession, a surveyors' body warns. The Royal Institution of Chartered Surveyors (Rics) said 49.1% more surveyors saw price falls in December than reported a rise. This was the gloomiest figure since November 1992.
Prices have been hit by last year's interest rate rises and tighter lending criteria, Rics said. Other surveys have also indicated the market is slowing.