Response to UK interest rate cut
December 13, 2008
In early October the government and the Bank of England surprised the nation by cutting the base rate by 0.5% a day ahead of the scheduled Monetary Policy Committee meeting, where interest rates are usually cut. Like a number of other central banks across the globe, the Bank of England cut the base rate in an emergency move to try and boost the failing economy and stave of recession, and the move was welcomed by many consumers and industry groups.
However, with the financial crisis deepening, and with many retailers suffering low sales levels even in the run up to Christmas the government decided to take further surprising action this month, and following the November MPC meeting announced that it was slashing the base rate by 1.5%, taking the rate to just 3%. This is the lowest that the base rate has been since 1955, reflecting just how concerned officials are about the state and future of the economy. Consumer spending has been affected since the series of interest rate increases between August 2006 and July 2007, coupled with soaring inflation, food prices, petrol prices, and bills over the course of this year.
The huge base rate cut has been welcomed by consumers and various agencies, many of whom have been calling on the government to slash rates in order to try and get the economy back on its feet. However, the concern for the government now is just when and by how much the UK’s struggling banks will pass on the base rate cut to consumers.
Alistair Darling, the Chancellor, stated: “I think it’s essential that the banks do pass on the benefit of lower interest rates to people and to businesses. Banks need to understand that they need to help their customers.”
The response of the Shadow Chancellor to the huge rate cut was: “This is a shot in the arm for the economy, but it shows how sick the patient is.” However, the CBI was pleased with the move, and said: “This is a bold and welcome move by the Monetary Policy Committee, and achieves what the CBI had been calling for. This cut should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers.”
The TUC agreed with the move, adding: “It shows the Bank now understands that the problem is recession not inflation.”
Another industry official said: “The sooner we get interest rates down the less is the risk of a long and deep recession.”
However, some officials are concerned that the level of the rate cut shows just how concerned the government has become about the economy and the imminent recession, and some think that the rate cut - no matter how dramatic - has come a little too late to stop the economy from sliding into recession.
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