Will the drop in interest rates help the economy?
March 4, 2009
There have been unprecedented cuts in the UK base rate over the past five months, with the Bank of England slashing rates each month, resulting in the rate falling from 5 percent in October to just 1 percent following the February Monetary Policy Committee meeting.
This was a stark contrast to the 2006 and 2007 period, where the central bank was steadily increasing interest rates over the course of a year or so, leaving many struggling to keep on top of their mortgage repayments. However, after peaking at 5.75 percent the base rate started to come back down, and is now at its lowest in the history of the central bank, which spans over three hundred years.
As most people are only too well aware the economy in the UK has been on a downward spiral for some time, with the housing markets, financial markets, and other sectors suffering. Consumers have been struggling with their finances for some time, and the nation has now fallen into recession, which many officials expect to be a long and painful one.
Recent reports have indicated that the government hopes to achieve a number of goals through such drastic reductions in the base interest rates, but not everyone is convinced that this action will result in these goals being reached. The government is hoping that by reducing the base rate to this level consumers will be left with more money, which will result in increased spending, and that this will boost the economy and minimise the adverse effects of the recession. However, some officials have suggested that this may not be the case, and that what is needed it increased access to finance for businesses rather than reducing interest rates further.
The Federation of Small Businesses has recently stated that most of its members had preferred the government to improve access to finance for small businesses rather than reducing interest rates, and one official from the FSB said: “These figures suggest that the recent interest rate cuts are not having the desired effect and other means of economic stimulus are required.”
An official from the Building Societies Association has also commented on the damage rather than the good that the interest rate cuts are having. He said that savers were really suffering as a result of the base rate cuts, which was leaving many earning little or no interest on their savings. This in turn was resulting in a reduction in deposits from savers, which was affected the access that building societies had to finance to fund their mortgage lending.
Another thing that has been noted is that whilst borrowers have found that their mortgage repayments have come down as a result of the base rate cuts many are not using this extra cash to spend and boost the economy. Instead, many have decided to do things such as pay off debt with the extra cash, put more money aside for emergencies during the recession, and even to overpay on their mortgage by maintaining their existing monthly repayments rather than reducing their monthly repayments in line with the base rate cuts.
Another official said: “The Monetary Policy Committee is right to cut Bank Rate to 1%, even though some question the merit of doing so without greater effort to increase the availability of credit to hard-pressed businesses.”
However, he added: “With conditions in the job market deteriorating rapidly what’s needed now to stem the rise in unemployment is early action to boost the supply of money to our cash-strapped economy.”
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- Drop in insolvency numbers A recent report has shown that the number of people that are being declared insolvent in the UK has fallen across England and Wales. The third quarter of the year saw a drop of 3%
- Will interest rates drop to 0%? Since October of last year the UK has seen the base interest rate plummet, and it has fallen from 5 percent in October to just 1 percent following the February Monetary Policy Committee meeting, following
- Drop in property prices leads to increased sales According to recent reports there has been a drop in the amount that many homeowners are asking for their properties, and this has led to an increase in property sales. With property sales having slumped
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