Interest rates cut by 1.5%
- Thread starter DanMartin
- Start date
None of this makes sense to me.
(1) There's a shortage of credit so, according to the laws of supply and demand, depositors should be getting a higher rate of interest on their money.
(2) And, because the economy is in trouble and house prices are down 15% over the year, risk of lending is higher. So, to cover that risk, banks should have a greater spread between the interest rate they pay and the interest rate they charge.
Both of those things should be pushing interest rates up.
So, why are they falling?
It is just that the Bank of England are willing to lend our money at an artificially low rate that no sane private investor would lend at?
If so, then doesn't that make this interest rate cut just a form of taxation/bailout?
Maybe the money people would like to comment on this and explain why I'm talking bollox?
Steve
(1) There's a shortage of credit so, according to the laws of supply and demand, depositors should be getting a higher rate of interest on their money.
(2) And, because the economy is in trouble and house prices are down 15% over the year, risk of lending is higher. So, to cover that risk, banks should have a greater spread between the interest rate they pay and the interest rate they charge.
Both of those things should be pushing interest rates up.
So, why are they falling?
It is just that the Bank of England are willing to lend our money at an artificially low rate that no sane private investor would lend at?
If so, then doesn't that make this interest rate cut just a form of taxation/bailout?
Maybe the money people would like to comment on this and explain why I'm talking bollox?
Steve
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Interesting. I don't like this either, for many reasons. The news media pundits will love it of course.
I thought I'd be a lone dissenting voice here on a business board, but it looks as if I'm not.
Large numbers of people, many on low incomes, will have their lives made harder by low interest rates. This is a transfer of wealth from them to young housebuyers.
I thought I'd be a lone dissenting voice here on a business board, but it looks as if I'm not.
Large numbers of people, many on low incomes, will have their lives made harder by low interest rates. This is a transfer of wealth from them to young housebuyers.
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The cut is only good if the banks pass it on to their customers, will they? If so, then new mortgages will become more affordable and will hopefully kick start the housing market.
However, when the base rate goes back up then the people with these new mortgages will struggle and we will be back to square one.
However, when the base rate goes back up then the people with these new mortgages will struggle and we will be back to square one.
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I don't get it either.
In the States, the rate has been slashed to an even more artificial low of 1%
If this is an attempt to re-inflate the housing market, haven't we already learned that an economic model that relies on an overpriced housing market to fuel demand doesn't work - neither here in the UK nor over there in America?
Businesses need to rekindle demand for their products. For some, weakening sterling will provide export opportunities. For other businesses, stuck in the home market, Government needs to come up with something a bit cleverer than an artificial interest rate cut to rekindle the economy. Historically, a war does the trick!
In the States, the rate has been slashed to an even more artificial low of 1%
If this is an attempt to re-inflate the housing market, haven't we already learned that an economic model that relies on an overpriced housing market to fuel demand doesn't work - neither here in the UK nor over there in America?
Businesses need to rekindle demand for their products. For some, weakening sterling will provide export opportunities. For other businesses, stuck in the home market, Government needs to come up with something a bit cleverer than an artificial interest rate cut to rekindle the economy. Historically, a war does the trick!
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One thing the Government might try to rekindle demand is a large dose of patriotism to encourage people to buy goods from the home market.
This worked in the 'sixties sterling crisis, with the "I'm Backing Britain" campaign, whereby people were encouraged, via advertising, to "Buy British". Of course, England had just won the World Cup, which helped that hedonism. A lot of people ended up with naff Morris 1100s and faulty Electrolux fridges, rather than buy sleeker Italian models.
One thing that will help UK businesses sell to our home market is the weakening value of sterling - because foreign imports become more expensive. Cutting interest rates artificially should further weaken sterling.
This worked in the 'sixties sterling crisis, with the "I'm Backing Britain" campaign, whereby people were encouraged, via advertising, to "Buy British". Of course, England had just won the World Cup, which helped that hedonism. A lot of people ended up with naff Morris 1100s and faulty Electrolux fridges, rather than buy sleeker Italian models.
One thing that will help UK businesses sell to our home market is the weakening value of sterling - because foreign imports become more expensive. Cutting interest rates artificially should further weaken sterling.
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The housing market doesn't need kick starting. The market is adjusting and we have to take the pain, because there has been years of artificial inflation in house prices.
Brown is just trying his 'cheap credit' trick for one last time, in desperation.
The party is over though, and every body has left! Time to clear up the mess.
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But I don't want to keep lowering the price, £15k in 3 months, luckily I am in a position where I will never have negative equity, what about everybody else though?
Some of the prices now are reasonable but people have been scared so much by the negative press over the past few months that nobody is prepared to chance it.
To be honest I am looking at it from a selfish point of view, I just want the maximum money out of my house as I can and as soon as possible.
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M
Mattonella Tile Studio
From a personal point of view though if more people are spending at Mattonella, more money in the company account, more money in the personal saving account, so the banking system will get savers this way.
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It certainly won't help many of those businesses who fund their company through factoring or invoice discounting as many of the factors have their interest charge expressed as a percentage over Base but with a minimum of 5%
Other factors have been hastily moving all of their contracts over to LIBOR whether the clients wants it or not
Other factors have been hastily moving all of their contracts over to LIBOR whether the clients wants it or not
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It would be really good if housing could be separate from the real economy. Housing was of course out of control and did not stack up and this reduction may end up propping up, what is a house with no foundations 
However, the real economy of business investing and spending is going to take a tanking in the next 12-24 months maybe longer. Therefore they are trying to help business. Unemployment is going to rocket and businesses going bust is already double last years figures and there is a lot worse to come, so this reduction is about confidence building.
The threat of deflation is also being taken seriously. I actually think we will see the lowest interests rates in the UK that anyone can remember at 1.5% to 2% mid next year.
Have a look at Japan over the last 10 years. Not an exact comparison but some of the issues were very similar.
The real issue is will the banks pass it on our use it to rebuild their balance sheets in quick time.
However, the real economy of business investing and spending is going to take a tanking in the next 12-24 months maybe longer. Therefore they are trying to help business. Unemployment is going to rocket and businesses going bust is already double last years figures and there is a lot worse to come, so this reduction is about confidence building.
The threat of deflation is also being taken seriously. I actually think we will see the lowest interests rates in the UK that anyone can remember at 1.5% to 2% mid next year.
Have a look at Japan over the last 10 years. Not an exact comparison but some of the issues were very similar.
The real issue is will the banks pass it on our use it to rebuild their balance sheets in quick time.
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E
euphoman
I think adventure life has hit the nail on the head. It's all about confidence.It is a bold move.I read an article this week where one economist suggested a 1.5% drop but he didnt believe it would happen-I reckon he could have made a fortune if he'd laid a bet on it!
The levels of lending seen over last few years are a thing of the past.Lenders to the residential and commercial sectors will lend at lower LTVs and Tracker Mortgages may disappear. I also think there may be a further reduction in rates next year and as long as Oil prices remain steady and there are no other sleletons falling out of the financial sector cupboard then a period of interest rate and inflation stability will be a good thing.
I think this Credit Crunch episode was a necessary financial correction and may encourage people to now start saving-albeit rates will be poor.
I have a real concern for those in their twenty's and even thirtys who have no Pension-they need to do something now.
There will also be many who have gone too far into debt and may have to go down IVA,Bankruptcy, repossession as well as those who suffer redundancy.There may still be large number of businesses failing so this drastic drop in Rates may enable debts to be more easily serviced and perhaps reduce the Corporate failure number.
We all need the Banks lending to one another so that LIBOR can come down . In the past it's been as low as 0.12% above Bank Base Rate yet at the beginning of this week it was approx 5.75%. It should come down again on Monday perhaps below 4.75%!
The levels of lending seen over last few years are a thing of the past.Lenders to the residential and commercial sectors will lend at lower LTVs and Tracker Mortgages may disappear. I also think there may be a further reduction in rates next year and as long as Oil prices remain steady and there are no other sleletons falling out of the financial sector cupboard then a period of interest rate and inflation stability will be a good thing.
I think this Credit Crunch episode was a necessary financial correction and may encourage people to now start saving-albeit rates will be poor.
I have a real concern for those in their twenty's and even thirtys who have no Pension-they need to do something now.
There will also be many who have gone too far into debt and may have to go down IVA,Bankruptcy, repossession as well as those who suffer redundancy.There may still be large number of businesses failing so this drastic drop in Rates may enable debts to be more easily serviced and perhaps reduce the Corporate failure number.
We all need the Banks lending to one another so that LIBOR can come down . In the past it's been as low as 0.12% above Bank Base Rate yet at the beginning of this week it was approx 5.75%. It should come down again on Monday perhaps below 4.75%!
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B
Bri
I think Abbey were putting their rates up, yesterday so it counters to 0.5% decrease, RBS put their charges up earlier in September. I think its all rather confusing really:|
On breakfast news this morning new car sales were down 20% last month effectively Mr B losing 20% in VAT/car.
Does anybody know what their doing?
On breakfast news this morning new car sales were down 20% last month effectively Mr B losing 20% in VAT/car.
Does anybody know what their doing?
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the rate drop won't help anyone apart from maybe the banks declare bigger dividends next year!
What we need is resonable fuel prices, food prices, quality transport and fair pricing......all of which is far beyond this or probably any other government! They need to stop dicking around with the NHS and education, buy some more beds and employe more teachers instead of wasting billions on cr**py computer systems and meaningless exams. It all seems so simple to me. When you've sorted this lot out then come back to me with some money laundering plan for the banks. O yeah build some more prisons!
The whole place has gone to pot in my view. Very depressing....o to be a student again.
What we need is resonable fuel prices, food prices, quality transport and fair pricing......all of which is far beyond this or probably any other government! They need to stop dicking around with the NHS and education, buy some more beds and employe more teachers instead of wasting billions on cr**py computer systems and meaningless exams. It all seems so simple to me
. When you've sorted this lot out then come back to me with some money laundering plan for the banks. O yeah build some more prisons!The whole place has gone to pot in my view. Very depressing....o to be a student again.
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C
creospace
The sceptical among us might notice that the US had it's confidence boosting news yesterday, surely it's no coincidence that today the Uk announces news like this to the day after?
I'm not entirely sure how it effects me personally. We rent so I'm happy for house prices to keep falling ha hem sorry 'adjusting'. We don't have a lot of savings either.
I would like to see confidence regained in the economy and for this 'recession' to not happen (if it has already started).
Should be an interesting thread to see how it effects others.
I'm not entirely sure how it effects me personally. We rent so I'm happy for house prices to keep falling ha hem sorry 'adjusting'. We don't have a lot of savings either.
I would like to see confidence regained in the economy and for this 'recession' to not happen (if it has already started).
Should be an interesting thread to see how it effects others.
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B
Bathead
Well things are changing quite rapidly, but from a selfish point of view i'm laughing (if I remove the house price correction). We were renting and had a reasonably large amount in the bank. Just bought with a .98% + tacker, so i'm dancing a jig today.
Something will come along to bite me on the bum though!
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Interesting. And in it he links to a blog post he wrote at the weekend called "Why interest rates aren't falling" where he said:
which is along the lines of a point in my post on p1 of this thread.
So, apart from the banks lending out our money to their customers (at a premium), who is really going to benefit from this?
Steve
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M
Mwebb
Working within the mortgage market at present, I am watching all the notifications flash up on my screen that the lenders are pulling their rates.
Recent experience dictates that a tracker at 1% above base rate is about to be raplaced with one 2.5% above base rate-or potentially removed from the market all together.
Recent experience dictates that a tracker at 1% above base rate is about to be raplaced with one 2.5% above base rate-or potentially removed from the market all together.
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For the last six years or so, the fixed interest rate on my mortgage has been 4-1/4 % (I managed to catch the very bottom of the rate cycle the last time around). After tax relief on the interest, this is an effective fixed rate of about 3%. I'd be surprised if rates drop that low in the current low interest cycle. If I can lock in to a rate of under 4%, though, I'd consider it.
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R
RLD Plastering and Tiling Services
the rate drop won't help anyone apart from maybe the banks declare bigger dividends next year!
What we need is resonable fuel prices, food prices, quality transport and fair pricing......all of which is far beyond this or probably any other government! They need to stop dicking around with the NHS and education, buy some more beds and employe more teachers instead of wasting billions on cr**py computer systems and meaningless exams. It all seems so simple to me
The whole place has gone to pot in my view. Very depressing....o to be a student again.
I agree wholeheartedly with this comment, if the government built more prisons it would help support the construction industry and the extra prison guards would help with unemployment, more beds would need more doctors and nurses all equals more people in work with money to spend hence improve the economy
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I think there are a number of very valid reasons why they needed to drop the rate by some much (or maybe I'm just playing Devils advocate?).
i) With bad sentiment and falling house prices, mortgage lending is (or is perceived as) more risky, so banks are widening their lending margins. I was able to re-mortgage to a tracker last September (1 month in to the trouble) at base+.49%... now you'd be very lucky to find base+1.49%... so dropping the base rate still leaves the profit/risk margin for the banks, whilst maintaining repayments for the borrower.
ii) Inflation is at 5.2%. Usually this would mean raising rates to curb spending, but it too puts pressure on the public, and subsequently businesses with wage demands. Public spending is thus falling, and this in itself is a cause of contraction, hence we are approaching recession. Dropping rates by 1.5% allows business and consumers to borrow if necessary to ease their cash flow, (and pay their staff appropriately). It's like loosening a belt buckle by one notch (or 3 in this instance).
iii) Prolonged inflation isn't good... but with falling demand and cheaper oil, inflation is expected to fall back to well below the target 2% in the next 18 months, so as it does, the rates can climb slowly to maintain balance. These small increases will discourage a re-ignition of the housing market AND prevent people from feeling any wealthier (so spending too much on the high street).
iv) The biggest call for a 1.5% cut is to shock the system. It's aimed at turning sentiment around, rather like an Adrenaline shot in the heart. Prolonged drops of .25% or even .5% go unnoticed, and the decline could drag-on much longer. This is a bold move which says the bank is taking the issues at hand seriously, and intends to provide a foundation from which the economy can start to heal.
v) Another point to consider is that with a year or two of high inflation, eased by low rates, the property market can level-out more reasonably... so although your £200k house might be worth less (as £200k has less buying power than the year before), it's still valued at £200k... rather than having to fall to £180k to make it affordable.
You may well disagree completely with all that I've written, but I personally thought it was a grand and decisive measure... Are rates are still higher than the US and essentially on a par with Europe... and it saves me £850 a month on the mortgage!
;o)
Take care,
A.
i) With bad sentiment and falling house prices, mortgage lending is (or is perceived as) more risky, so banks are widening their lending margins. I was able to re-mortgage to a tracker last September (1 month in to the trouble) at base+.49%... now you'd be very lucky to find base+1.49%... so dropping the base rate still leaves the profit/risk margin for the banks, whilst maintaining repayments for the borrower.
ii) Inflation is at 5.2%. Usually this would mean raising rates to curb spending, but it too puts pressure on the public, and subsequently businesses with wage demands. Public spending is thus falling, and this in itself is a cause of contraction, hence we are approaching recession. Dropping rates by 1.5% allows business and consumers to borrow if necessary to ease their cash flow, (and pay their staff appropriately). It's like loosening a belt buckle by one notch (or 3 in this instance).
iii) Prolonged inflation isn't good... but with falling demand and cheaper oil, inflation is expected to fall back to well below the target 2% in the next 18 months, so as it does, the rates can climb slowly to maintain balance. These small increases will discourage a re-ignition of the housing market AND prevent people from feeling any wealthier (so spending too much on the high street).
iv) The biggest call for a 1.5% cut is to shock the system. It's aimed at turning sentiment around, rather like an Adrenaline shot in the heart. Prolonged drops of .25% or even .5% go unnoticed, and the decline could drag-on much longer. This is a bold move which says the bank is taking the issues at hand seriously, and intends to provide a foundation from which the economy can start to heal.
v) Another point to consider is that with a year or two of high inflation, eased by low rates, the property market can level-out more reasonably... so although your £200k house might be worth less (as £200k has less buying power than the year before), it's still valued at £200k... rather than having to fall to £180k to make it affordable.
You may well disagree completely with all that I've written, but I personally thought it was a grand and decisive measure... Are rates are still higher than the US and essentially on a par with Europe... and it saves me £850 a month on the mortgage!
;o)
Take care,
A.
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L
leemason
When I studied economics in the late 1970's I had a text book which had a chapter called "Beware of kill or cure solutions... They can kill!". I can't think of a better example that this interest rate cut. If the market responds negatively (and the results of this cut are still settling into the market) then the Bank of England has no where else to go! They have poured billions into the banks. Cut the bank base rate, and all the banks do is to keep any possible benefits fo themselves.
I suggest that if the Government really wants to help small businesses then they set up a completely separate banking system to lend money sensibly to small businesses at reasonable rates. It is obvious that the existing system is not working. They are probably putting aside the benefits of rate cuts to pay the next round of bonuses!
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Aside from lending money to small businesses, a government backed guaranteed payment scheme would save a lot of businesses going to the wall.
That means the government underwrite the money owed to small businesses by other businesses. So when your major customer(s) go under, the government steps in and pays you whatever you were owed.
That's pretty much what they've done with the banks etc. The alternative is to let the domino effect of any small business going belly-up take hold, with the result that millions of us will end up on the dole unnecessarily.
btw I don't believe lower oil prices: I pay more than double for a tank of domestic oil, compared to what I paid three years ago. A few weeks back it was treble. Only an optimist could see that as lower oil prices. 5.2% inflation my hat!
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Well I am fairly cheesed off with it. We sold our house in the summer having taken a huge 'hit' on the price. Have not been able to find a house that when compared to land registry values is not getting on for £100k overvalue so are renting paying the rent with interest from the capital, waiting to be spent on a house, when the owners come out of thier 'denial'. Lower interest rates do not help our situation, and we would prefer to get on and buy a house, but not one that if we wanted to sell next year, we would have to take a further hit on it's value. I know we are not alone, there are many like us. Still I don't expect much sympathy, as clearly we do have some money in the bank.
What I don't understand however and am not really hearing anything about, it the fact that the government wants us to save for old age, to fund ourselves, yet are now hitting people who do that so badly. Pensioners in that situation will be taking a huge decrease in their income from interest. Where is the justice for these people, these are not rich people. Will the pensioners who have been hit by this artificial lowering of interest rates be seem marching to Downing Street. I do hope so!
What I don't understand however and am not really hearing anything about, it the fact that the government wants us to save for old age, to fund ourselves, yet are now hitting people who do that so badly. Pensioners in that situation will be taking a huge decrease in their income from interest. Where is the justice for these people, these are not rich people. Will the pensioners who have been hit by this artificial lowering of interest rates be seem marching to Downing Street. I do hope so!
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Hi LongNeck,
I don't think you need to worry too much. Maybe just shop for a new home for your savings.
You can still easily get 6% -> 7% on your savings... the banks want your cash to buy themselves out of their deals with the government and to continue trading without so much restiction... so it ISN'T hitting savers with the full impact as rate cuts may have done in the past.
I suggest you seach for a better savings account... and reap the benefit of being cash rich.
According to today's FT ICICI Bank is offering 7.1% still... but these rates are likely to fall... many providers have 6.5% though... also make full use of your ISA allowance for circa 5.5% tax free.
Take a look at http://www.moneysavingexpert.com/savings/savings-accounts-best-interest for some ideas of where you might get a good return (updated daily).
Hope this helps,
A.
I don't think you need to worry too much. Maybe just shop for a new home for your savings.
You can still easily get 6% -> 7% on your savings... the banks want your cash to buy themselves out of their deals with the government and to continue trading without so much restiction... so it ISN'T hitting savers with the full impact as rate cuts may have done in the past.
I suggest you seach for a better savings account... and reap the benefit of being cash rich.
According to today's FT ICICI Bank is offering 7.1% still... but these rates are likely to fall... many providers have 6.5% though... also make full use of your ISA allowance for circa 5.5% tax free.
Take a look at http://www.moneysavingexpert.com/savings/savings-accounts-best-interest for some ideas of where you might get a good return (updated daily).
Hope this helps,
A.
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