Interest rates cut to 1% - but is it worth it?

The Bank of England has predictably cut rates by another 0.5% - but will it really make any difference?

by
Last Updated: 31 Aug 2010

The Bank of England has cut interest rates by another 50bps to 1%, the lowest rate in its 315-year history. It’s the Bank’s fifth cut in a row, as the Monetary Policy Committee tries desperately to breathe life into the flagging economy – so far, it must be said, with relatively little success. In fact, some believe that further cuts are unlikely to have any real impact – and with a few (relatively) positive indicators emerging recently, there was a decent argument for staying put at 1.5%. But the Bank’s decision to cut suggests it’s still feeling pretty gloomy about our prospects for 2009…

This latest cut may sound like good news for those on tracker mortgages, but in practice it will probably make no difference: most banks have already cut their margins to the bone on their standard variable rates – any lower, and they’ll basically be paying to lend to people (quite literally, if they haven’t got a lower limit on their tracker deals). So it’s unlikely to put a huge amount of extra cash in consumer pockets. What’s more, it’s very bad news for savers, of whom there are six times as many as borrowers: despite the fact that the government is supposedly encouraging us to start saving money, we now have no incentive to do so – with rates well below inflation, the value of our savings is effectively shrinking.

The corporate world was also unconvinced, with many companies arguing that improving access to capital – the standard business bugbear – is much more important than continuing to fiddle ineffectively with the base rate. Indeed, a Federation of Small Business survey found that 63% of its members wanted rates to stay as they were. And others have been pointing to a few (relatively) positive economic signs: a slight rise in service sector activity yesterday, a slight rise in house prices today, and an increase in the money supply. So for the first time in months, there was a reasonable case for inaction.

However, the Bank has opted to cut again, which suggests that it doesn’t see any end in sight for our woes just yet. With the economy still contracting (1.5% last quarter) and jobs stigo down almost to zero – and if so, it might as well happen sooner rather than later, so the Bank can get on with employing less conventional measures, like ‘quantitative easing’ (effectively printing money). So we’re left in this curious halfway house – nobody seems to think today’s cut will make a massive difference, but it’s all a means to an end...


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