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).
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