Will the rate cut work?

“Interest rates are cut for the first time in two years, so does that mean we can spend more this Christmas?” so runs the headline from Radio One’s Newsbeat. As so often, it cuts to the chase. The million dollar question is how will lenders respond to the rate cut? How much clout does the bungling Bank of England have? For most of the last 20 years we have assumed a direct relation: base rate cut means lower mortgages and store-card rates.  But after the summer credit crunch, the BoE is losing credibility and clout. “It’s been running a ‘how not to” guide for monetary policy’ as one appalled banker told me last week. The divergence between the LIBOR overnight inter bank lending rates and the BoE base rate suggests something wrong in the relationship. It could well be that the banks ignore the BoE. So no one should celebrate until we see how, and indeed whether, lenders respond.