BoE cuts rates again as pound plummets

Interest rates are down again - but we're more worried about our summer holiday in the sun...

by
Last Updated: 31 Aug 2010

As expected, the Bank of England has announced that it’s cutting interest rates by another quarter point, down to 5%. It’s the third time in five months that the bank has cut rates, as it tries to fight off the effects of the credit crunch and get the money markets moving again.

However, these cuts haven’t been good for the pound, which fell to a record low against the euro yesterday in expectation of the rate cut. One pound is now worth a measly €1.25, which is barely enough for a decent bit of cheese these days. How fondly we remember those halcyon days of 2000 when it bought us about €1.80, or even last summer when it was worth about €1.50 – our meagre holiday budget went a lot further back then….

And it’s not as though the situation is much better if we stay at home. The rising cost of food and commodities (oil hit an eye-watering $112 a barrel this week) means that prices are still creeping up in the UK, with inflation still well above the Treasury’s 2% target. In fact, some even suggested the Bank might postpone a rate cut for that very reason, but clearly the Monetary Policy Committe decided that it was the lesser of two evils.

In fact, it’s been a pretty gloomy week for the economy – we haven’t been able to move for people telling us what a mess we’re in. The IMF said this week that the US financial crisis was the ‘largest shock since the Great Depression’, and slashed its growth forecast for the UK. Over here even mortgage lenders are now telling us that house prices are falling, while Gordon Brown and Alistair Darling’s reassuring noises about the UK economy have been met with fairly unanimous derision. So today’s rate cut wasn’t exactly a surprise.

However, chances are that it won't do most of us any good. It’s unlikely to mean we’ll pay less on our mortgage, for instance – as long as the banks are still finding it hard to borrow money from each other, there’s no chance of them passing any savings on to us (unless your rate is tied to the base rate, of course, in which case they have no choice). It’s unlikely to mean that prices stop rising on the high street – quite the reverse, if anything. And it will almost certainly mean that one of the few things we have to look forward to – our summer holiday in the sun – costs a lot more than it did last year.

Oh well – at least staying at home this summer spares us the horror of a trip to Terminal Five...

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