Uk Interest Rates Cut To 0.25%

[mikey4444]

http://www.bbc.co.uk/news/business-36976528

I am not really sure what the Governor of the Bank of England is trying to do here .....can anyone please explain ?

[jim360]

What surely matters is the rate in real terms. At the moment, with relatively low inflation, a 3% interest rate is at least a small money earner. Not much, for sure, particularly with (to pick a figure entirely at random) around £15,000 or so or total savings, it's only around an extra £400 over the course of a year. 10% looks more impressive but isn't really when inflation itself is 8% or so, and I think in fact that means that in real terms savings would be a similarly low earner.

It's obvious that in the last few years the Bank of England has been trying to encourage spending as far as possible. I don't have the first clue really how successful or even desirable that is, although personally as a saver rather than a spender I'm not sure that I will enjoy the latest round of lower interest rates all that much.

[gulliver1]

Will this mean we can get deeper in debt, or we can attract more Immigrants here to buy houses, because of lower morgage repayment? . Now I know what Brexit means!

[fiction-factory]

Yes, whilst I understand the reason for the reduction and I don't think the rates paid by banks if you shop around are as dire as some have suggested, it is not great news for me. I too have always been more of a spender than a saver and the idea of using some of my pension pot to get an annuity is now even less attractive. I would agree that those who rely on annuities have not done well in recent years

[New Judge]

“And I think the measure is not aimed at encourage more borrowing by the feckless, NJ- it's aimed more at getting those with maybe £50000 in the bank to start spending some of it .”

It may well achieve that aim, f-f. But it will also have the unfortunate side-effect of encouraging people to spend money which, not only that they haven’t got but which, when sanity is restored, they won’t have a hope in hell of repaying. It’s precisely what happened in Greece, with disastrous results. The Greeks (both individuals and the government) borrowed huge sums of cheap money that they could not ever repay. The results are now plain to see.

I only did Economics to ‘O’ Level in school (this, of course, was before everybody had learned everything there was to know). However, in my naivety I see a fundamental flaw with the current strategy. The ultra-low interest rates are designed to encourage people to borrow to “invest”. The major drawback to this is that the cash has to be made available from somewhere. Normally savers provide it in exchange for decent recompense (i.e. interest). But of course with such low rates they are less likely to put their cash in the bank. They may buy gold, shares, Rolex watches or simply spend it. In any event, the money needed to be loaned out will be less plentiful. So for the strategy to work the dosh must come from elsewhere. Step forward “quantitative easing” (aka printing worthless money). So the government prints money which has not be created or earned so that people can borrow it at almost zero interest rates.

I could go on, but essentially the same thing will happen to the UK as happened to Greece and those presiding over this “strategy” need to take a step back and take a look at what they’re doing.

[sandyRoe]

If someone had 10K in a bank today what would it be worth in a years time? They'd still have their money and the small amount of interest but by how much would inflation reduce it?

[jim360]

I would have thought they've already taken a step back and thought about this. It's clear anyway that, as the MPC wasn't unanimous in supporting all the measures and that economists are perpetually in disagreement about what should actually be done that any particular course of action has benefits and drawbacks, and it's difficult to weigh these precisely. One obvious way of seeing this would be the respective reactions of the stock markets and foreign exchange markets -- FTSE indexes saw a sizable boost in the hour following the announcement (1.5% or so), while the pound fell by about the same relative amount against all other currencies. I don't know which is more important, although as various Brexit supporters have been pleased to see the lower value of the pound presumably this announcement is further good news for them. Certainly the Daily Express thought so, loudly cheering the fact that the growth forecast for 2017 "only" fell from 2.3% to 0.8% (or, assuming I've calculated correctly, something in the region of £30 billion lower GDP compared to expectations next year). Maybe the MPC's moves today are an overreaction but I suppose we'll never really know.

Still seems that we aren't quite sure what has actually happened to the economy post-referendum. Technically nothing should have happened yet, but the mood is clearly deflated. Even though the worst predictions of doom and gloom appear not to have materialised, it's quite impressive in a way just how much even general feelings can affect economic assessments.