Bank cuts rates by 1.5 percent
Fraser Nelson 12:45pm
The dramatic and urgently-needed cut in base rates – by 1.5 points to 3 percent – is a comment on the extent of the deep recession that Britain is sliding into. It has been made possible by the collapse in inflation expectations.
Because fewer Brits will have salaries - and most of those who have are coping with real-terms pay cuts - shoppers’ wallets are empty of earned and borrowed cash. Shops will have to slash prices to move goods – it will be murder on the high street. Ergo the collapsing inflation expectations allow the MPC to drop rates. In fact the recession will be so bad that we can probably expect BoE base rates to keep going until they reach 2%.
As Osborne has been saying, this rate drop is more important than any governmental stimulus. It’s very good news, especially for the happy few on a variable mortgage anchored to the BoE base rate (as opposed to LIBOR). We can prepare for ministers to say “now the banks must pass the rate on” trying, as they always do, to shift the blame. It is the height of hypocrisy to make such demands on independent banks when the state-owned Northern Rock refuses to lower its rates, so let’s keep our eye on that first.
When Brown, in PMQs yesterday, claimed that inflation is coming down, it may have sounded strange to anyone who has bought anything recently. But this wasn’t a Brownie. He is right: inflation will now tumble, probably back to 2% by this time next year and that’s what now allows the MPC to cut rates.
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Interested
November 6th, 2008 1:01pm Report this commentWasn't the Titanic's appalling lifeboat system responsible for a great loss of life?
Rhoda Klapp
November 6th, 2008 1:05pm Report this commentDebt-fuelled boom n bust? Easy credit is the way out, isn't it?
Isn't it?
Chris Harrison
November 6th, 2008 1:15pm Report this commentSurely Vince was calling for this before boy George?
The Laughing Cavalier
November 6th, 2008 2:04pm Report this commentSo much for the myth of Bank independence.
Max Usher
November 6th, 2008 2:28pm Report this commentA good deal lower than 2% methinks. Commodity prices will have fallen off a cliff (the cause of the bout of inflation we have had) while as you say shifting consumer goods on the high street will be mission impossible. Undershooting (i.e inflation below 1%) is a distinct possibility. "Helicopter" money here we come.
mac
November 6th, 2008 2:55pm Report this commentAll done in the national interest . . .
. . . of the Labour Party.
C Powell
November 6th, 2008 3:18pm Report this commentInflation going down? What world are you living in, Fraser?
Council tax up, electricity and gas bills up, tube & rail fares up. These are things we have to pay for, not optional extras like some T-shirt from Primark. Real inflation is up and higher than the fantasy figures used by the Government and the BoE. Go and look at your household bills, Fraser, if you don't believe me and come back to me next year and tell me that all these things will have gone up by less than 2%.
The effect of inflation and cuts in income for savers will be to harm pensioners, those with little discretionary income and savers.
Commentators should think about the effects in the real world: this is not just a game about Gordon and Dave and George.
Jim
November 6th, 2008 3:26pm Report this commentAre you over looking, or just completely clueless and unaware, of the effects that all the newly printed money are going to have? This time next year there will be very high inflation, if not hyper-inflation. I bet you got an economics degree from a British University.
Gordon Brown has never been right about anything.
You actually say "When Brown, in PMQs yesterday, claimed that inflation is coming down, it may have sounded strange to anyone who has bought anything recently", so if we ignore reality Brown might be right.
david
November 6th, 2008 3:39pm Report this commentSaw Osborne on the news, he really is terrible and so unconvincing, no wonder Vince Cable is chosen to comment before him.
Puncheon
November 6th, 2008 3:40pm Report this commentIt is the sign of idiocy to continue to carry out the same actions in the expectation of different results.
cjcjc
November 6th, 2008 4:01pm Report this commentGoodness me - it will tumble all the way back to, erm, the middle of the target range.
It is the Bank's asymmetric attitude to the inflation target which has got us into this mess.
An overshoot of 3% is regarded as a far better outcome than an undershoot of 3%.
So much for encouraging a culture of saving when the Bank is determined to destroy - or at least fail to protect - the real value of savings.
Punk Economist
November 6th, 2008 4:19pm Report this comment"As Osborne has been saying, this rate drop is more important than any governmental stimulus."
Unless we have a Japan-style deflation, in which case the solution is the exact opposite of what Osborne has been advocating. So there's a 50-50 chance he's right, which is better than usual.
Simon
November 6th, 2008 8:02pm Report this commentMaybe the way out of this crisis (downturn?)is not to be found in the mainstream. Just as Keynes was considered a heretic in the 1920s and 1930s, so perhaps the person to imagine the most appropriate successor to the Keynesian model is not to be found among those thinking that the way forward must be organic from where we are. Could a shift of logic be required?
Trouble is, just about all our present politicians seem to be slaves of the mainstream, not leaders of it. Their originality seems to be confined to presentation, not policy. New forms of presentation may get us nowhere, I'm afraid.
Peggy Sinc
November 6th, 2008 8:24pm Report this commentInflation falling - are you mad? Just returned from a trip to Zimbabwe or something?
Fraser Nelson
November 6th, 2008 8:34pm Report this commentJim, I went to Glasgow Uni (I ended up in its School of Soviet Studies, but that's another story) so very British. And my prediction comes from analysts' forecasts. Jim, I know it sounds unbelievable. I will do a separate post on this later.
Winston Place
November 7th, 2008 5:26pm Report this commentIam a pensioner saved all my life.
My interest in the Building Society supplements my pension.
My household bills have increased over 25% in 365 days.
Now I get less interest with the reduction due the rate cut.
I have only been in debt twice in my life £21 a cycle from Curry's in 1963 and £400 loan for a two year old car in 1966.
Never had a mortgage saved up for everthing.
there are a lot like me out there.
Eventually within 5 years or so the £ sterling and the Us $ will be worthles.
All fiat money.
The emperoper has no clothes
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