Will Brown benefit from the interest rate cuts?
Fraser Nelson 1:25pm
The VAT cut may have been economically and electorally irrelevant, but might all these interest rate cuts deliver for Gordon Brown? History will be made tomorrow when the Bank of England cuts rates to the lowest in its 315-year history - probably by half a point, to 1.5%. And even that will probably fall to 1% before Easter. A friend emails to say he has become a "reluctant buyer of Gordon Brown stock" - his mates are getting cheap mortgage deals, at 4% or 4.5%, saving hundreds a month. This will create a feelgood factor amongst a certain group.
Once rates do fall to 1%, of course, the Monetary Policy Committee will have run out of ammo. That's when things like printing money, or quantitative easing to give it its euphemistic name, come on to the agenda - and sterling (now back up to 1.10) looks vulnerable again. But for those with 25% equity in their house, there are plenty of good deals to be had - yet my hunch is that those in this category will be likely Tory voters. But there is no denying it: for those with job security, a bit of equity and a variable mortgage, 2009 will not be a bad year at all.
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Comments
Bruce Robertson
January 7th, 2009 1:59pm"For those with job security" - a rapidly dwindling bunch.
cuffleyburgers
January 7th, 2009 2:22pmFraser - what the Brown giveth (indirectly) via mortgage rate cuts, Brown also taketh away via collapse in sterling, tax increases generally (either immediate or deferred) - until the deluded God character actually does something to shrink the state and therefore increase national productivity it is hard to see how any of this can amount to more than rearranging the deck chairs...
C Powell
January 7th, 2009 2:26pmWell I have a job, a lot of equity and savings and 2009 is looking pretty awful, frankly, because: -
(1) Inflation is at 4% (on the CIP calculation) but I can't get that level of after tax interest on any savings so my money is steadily losing its value;
(2) If money is printed, we will get even more inflation and my savings will lose even more of their value;
(3) No-one can assume they have job security - other than in the public sector of course. I certainly am cutting back on unnecessary spending so that I have a cushion to help me if the worst does happen;
(4) If I want to go on holiday, it will cost me considerably more than previously;
(5) There are tax rises on the way (more than have been announced) and as one of the prudent middle classes, guess who will be paying those?;
(6) I suspect there will be worse to come re the banks' position. Certainly, I cannot assume that any financial institution is a safe haven for my savings; my pension investments have been hammered so if I want a comfortable retirement I will have to save even more out of a declining income.
Above all, I have a government I don't trust which is thrashing around taking actions in panic mode, not in the long term interests of the country but only in their own short-term political interests. I simply don't believe that things will get better any time soon - whether for the country or for me personally - and, for the first time, I'm seriously considering emigrating so as to give my children a real future.
hadrian
January 7th, 2009 2:30pmShort term self interest that will lead to long term disaster. Again up to the Opposition to point out the hard reality loud and clear!
mart
January 7th, 2009 2:54pmHi Fraser, those folks who have such a mortgage probably also have some cash savings as well.
And maybe their parents and aunts/uncles are nearing retirement, or have retired, with a substantial propotion of their wealth and income being in cash savings.
Such cash savings are jeopardised by low savings rates, as C Powell says eloquently, above.
I am surprised, therefore, if so many people will give the government credit for bringing interest rates down.
bye bye UK
January 7th, 2009 3:17pmC Powell - interesting. I think exactly the same. Given your stated priorities - to where might you consider emigrating?
Sally Chatterjee
January 7th, 2009 3:20pmIt all depends on the equity in your home. If you've got a lot, then you can get cheap mortgage deals.
If you have little equity then you struggle to find a good deal and worse, you see the property price fall and pushing you close to negative equity.
I think some in their 30s and 40s are winners but people in their 20s and 50s and beyond are losers, because they will struggle with bad mortgages and savings that can't even keep pace with inflation.
Andy
January 7th, 2009 4:18pmI'm a pensioner - Brown hasn't benefitted me. Inflation and low interest rates are disastrous for those of us who've been prudent.
oldtimer
January 7th, 2009 4:24pmFurther cuts in bank rate will not necessarily mean cuts in interest rates to you and me - unless you are a saver, when you will be hammered.
The issues facing the UK are more fundamental than the prevailing level of interest rates. If anyone doubts this, I recommend they read Martin Wolf in the FT today. He describes the fundamental problem of the imbalances in the world economy today. This is especially bad news for the UK, despite the help exporters may get from a fall in the £ fx rate versus other currencies.
More and more people are bginning to understand the need to pay down debt and live within their means. Personal indebtedness is so high, as you have previously pointed out, that it will take some time to unwind to sustainable levels.
What the country needs is the return of a savings and enterprise culture. This requires a rebalancing of the economy away from the state and towards the private where the nation`s wealth is, ultimately, created.
Travis Bickle
January 7th, 2009 5:27pmWell I just got a letter from Amex declaring their new interest rates for unpaid balances is a mouthwatering 32.0%APR, but at least I can get about 1.5% (before tax) on savings... So I suspect rather a lot of people are not going to see any benefit whatsoever from this interest rate cut!
Cynical Voter
January 7th, 2009 6:11pmI want to be a credit card company able to raise my charges at will. It is great to get savers' money for 1% and lend it out at 29%. Gordon Brown has done wonders for his banker friends....he should consider which of them will reward him with a Blair Scholarship.
With HMRC, Utility "Regulation" and Credit Card Rates Brown has truly shafted the ordinary voter
Simon
January 7th, 2009 6:36pmI am an NHS doctor so my job is about as secure as anyone's and I have 40% equity in my house, but I will certainly not be voting Labour in 2009. I hold Gordon Brown squarely responsible for this recession and this economic crisis stinks of the state Labour left the country in in 1979.
The only way we're getting the economy back on track in the long term is with a Tory government, even if Cameron is the leader.
Interesting, I remember last year Cameron was saying that he wanted to be a social reformer in the way that Thatcher was an economic reformer. I bet that policy's on the scrap heap now because the only thing on our minds come election time will be the economy!
MC Shalom P. Hamou
January 7th, 2009 7:30pmSorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.
In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.
Hence, the Keynesian paradigm I = S is not verified.
The purpose of Quantitative Easing being to lower the yield on long-term savings and increase liquidity it doesn't create $1 of investment.
In a Liquidity Trap the last thing the Market needs is liquidity.
Quantitative Easing does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on long-term savings.
Those purchases maintain the demand for long-term asset in an unstable equilibrium.
When this desequilibrium resolves the Market turns chaotic.
This and other issues are explored in my tract:
A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order
Abstract:
This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.
It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.
It solves most of the puzzles of macro economy: among which Unemployment, Business Cycles, Under Development, Trade Deficits, International Division of Labour, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...
It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.
A Credit Free, Free Market Economy will correct all of those dysfunctions.
The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.
In This Age of Turbulence People Want an Exit Strategy Out of Credit,
An Adventure in a New World Economic Order.
A Specific Application of Employment, Interest and Money
http://www.17-76.net/interest.html
Press release of my open letter to Chairman Ben S. Bernanke:
Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.
http://www.prlog.org/10162465.html
Yours Sincerely,
MC Shalom P. Hamou
Chief Economist & Master Conductor
1776 - Annuit Cœptis.
quadratus
January 7th, 2009 7:34pmIt is very clear that the Banks are reluctant to lend money because there is a time-bomb of long-standing debt on credit cards which will be left in their laps when the card holders lose their employment