Money, money, money!

The Bank of England on Thursday announced unprecedented steps to prevent the deepest slump since the 1930s when it unveiled plans to inject up to £75bn into the economy over the next three months.Alarmed by signs that Britain's malfunctioning banking system is starving consumers and businesses of credit, Alistair Darling gave Threadneedle Street clearance to begin creating money – the last-gasp measure used by Japan to end a decade of recession and deflation.The Bank said it would embark on quantitative easing next week, after its monetary policy committee cut the bank rate for the sixth time since the global financial system came close to collapse last Oct­ober. The rate is now 0.5% – a level not seen before in the Bank's 315-year history.
Mervyn King, the Bank's governor, said it was unlikely that bank rate could go any lower and policymakers would shift focus to creating money instead. "We are very close to zero. What we are doing now is switching to injecting money into the economy directly."

Link to The Guardian

Bank creates cash: 'This is the last roll of the dice - an unconventional weapon'

Larry Elliott on quantitative easing - printing money - Audio link

Is the decision to print money right? The experts think so. But ... Link

As predicted ... interest rate cut to 'historic 1%

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 News

Geoff Riley provides a good summary of the decision and a comprehensive chart-based student handout. Link

End of rate cuts?

As the Monetary Policy Committee begins its monthly meeting, an influential think-tank has said there was "not very much point" to the last cut. Martin Weale of the National Institute of Economic and Social Research said that other measures such as the Bank buying corporate bonds would be better. It is not the cost of credit that is deterring borrowers but that credit is not available. The think tank warned that the contraction of credit meant that rate cuts by the Bank of England were now ineffective in stemming the downturn. The NIESR predicted the UK economy would shrink by 2.7% in 2009, its worst performance for 60 years. Link to BBC News

With regard to the lack of available credit, see the video posted on the tutor2u blog. It concerns Leyland Daf trucks, explaining that whilst demand for vehicles is high, many smaller companies cannot get loans in order to puchase trucks whose price is around £100,000. It shows how this affects company production and employment, and its knock-on effects to suppliers and the local/national economy. Link

As the Monetary Policy Committee meets, the Bank of England announced that it has lent £185bn to financial institutions since April under its special liquidity scheme (SLS), set up to allow banks to temporarily swap assets that were difficult to trade, such as mortgage-backed debt, for UK Treasury Bills. It was designed to help encourage banks to resume normal lending practices by reducing the uncertainty that having illiquid assets on balance sheets was creating. Link to BBC News

UK already in recession - Bank of England

The Bank of England says the UK entered a recession in the middle of 2008 which will continue through 2009. In its quarterly inflation report, the Bank warns that the economic landscape has changed dramatically since August. It now expects inflation to decline to 1% by 2010, below its 2% target, in a dramatic change to its last forecast. This could open the way for further interest rate cuts if the Bank is to maintain inflation at its target rate in two years' time. "We are certainly prepared to cut bank rate again if that becomes necessary," said Mervyn King, the Bank of England's governor.

UK consumers plan to spend 7% less this Christmas than they did last year, a survey from business advisory group Deloitte has suggested. Deloitte warned this festive season may be "one of the toughest in decades" for retailers. The expected fall compares with a 7% rise in spending in 2007. (BBC News)

Government 'should change inflation target'

Consumers will be "crucified" unless the government changes its inflation target, a leading economist has warned. Peter Spencer from the influential Ernst & Young Item Club is urging ministers to change the 2% inflation target used by the Bank of England. He warned that interest rates would have to stay at 5% if inflation is to be brought down to 2%. He added that keeping interest rates at their current level would hurt hard-pressed households. Professor Spencer said consumers were paying the price for an inflation target that had become unrealistic given the volatility of oil and food prices. He called for the Bank of England's remit to change so it focused on "core inflation", a measure that excludes food and energy prices and is used in the US. Read details here.

David Smith's piece in the Sundaty Times also makes an interesting read, especially the divergence between base rate and other interest rates in the economy, those that have a real impact on economic activity. Link to article. Geoff Riley provides a summary of the key points on the tutor2u blog. Link

Does the CPI reflect the 'real' level of inflation in the economy?

UK growth lowest for three years

Economic growth in Britain has slowed to its weakest in three years, official data showed today, as last year's interest rate increases and the credit crunch take their toll. The Office for National Statistics said the economy grew 0.4% in the first three months of the year, down from 0.6% in the final quarter of 2007.

http://www.guardian.co.uk/business/2008/apr/25/gdp.growth
http://news.bbc.co.uk/1/hi/business/7366534.stm

What will be the effects of slower growth? Is this news likely to affect the interest rate decision of the Monetary Policy Committee(MPC) when it next meets?

Euro scales $1.60 for first time

The euro has hit a record peak against the US dollar on expectations of higher interest rates in the euro zone. It rose as high as $1.6019 as weak US housing market data underscored fears over the health of the US economy. The euro has rallied in recent months and Tuesday's peak came as European central bankers raised the prospect of higher rates to control inflation. http://news.bbc.co.uk/1/hi/business/7361342.stm

How are interest rates and exchange rates linked? What are the likely effects of the rise in the euro? The following video clip will provide some clues.

http://www.reuters.com/news/video/popup?videoId=80898&pos=7.733&vol=100&popPlayer=true&videoChannel=5

Pound continues to fall against Euro

The pound has touched another all-time low against the euro, driven by the Bank of England cutting UK interest rates as had been widely expected. One pound was worth as little as 1.2457 euros in Thursday trading though sterling later strengthened slightly, to be worth 1.2537.
The Bank trimming rates to 5% had already been priced in, analysts said. Interest rate cuts generally encourage investors to switch to other currencies which have a higher rate of return. While the pound went below 1.2500 euros, the European single currency touched as high as 80.3 pence.

http://news.bbc.co.uk/1/hi/business/7340272.stm

Is this good for the economy? What impact will it have on those who are contemplating booking a European holiday this summer?

(See http://www.tutor2u.net/blog/index.php/economics/interest-rates-exchange-rates-and-annual-holidays/#When:13:38:00Z)

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