Friday, January 9, 2009

Why Interest Rate Cuts Won't Work

The British bank rate was reduced to 1.5 per cent, the lowest since the central bank was founded (in 1694!!!) in a bid to revive the flagging economy.

But experts said the move would do little to help borrowers as banks fail to pass on the lower borrowing costs on to customers while savers see their accounts head towards zero per cent.

David Smith, of Dreweatt Neate estate agents, said: "As far as the property market is concerned, until lenders relax their criteria the Bank could just as well cut rates to zero but it would still be flogging a dead horse.

"It's not the rate at which money can be borrowed that matters so much right now, it's the supply of money - and that supply simply isn't there."

The Bank is now likely to consider other, less conventional attempts to boost the economy, including printing money, known as quantitative easing.

The Council of Mortgage Lenders described the latest cut as a "double-edged sword" for banks.

Michael Coogan, director general of Council of Mortgage Lenders, said: "While lower mortgage rates provide borrowers with the opportunity to repay their mortgage debt more quickly to reduce the term, lower savings rates impact lenders' ability to attract deposits and maintain the flow of mortgage lending in 2009.

"The market is still not functioning properly and is likely to lead to a fragmented approach by lenders, as they try to balance the interests of savers and borrowers and other pressures on their businesses, in responding to today's announcement."

The Bank of England's Monetary Policy Committee has reduced rates from 5 per cent to 2 per cent since the beginning of October.

Lloyds TSB said it is passing on the full rate cut to borrowers while Halifax and Abbey said its Standard Variable Rates are under review.

Mike Warburton, of accountants Grant Thornton, said: "The Bank rate has become almost irrelevant because it so detracted from the real economy.

"Banks need to offer savings rates in excess of bank rate otherwise there is no point in savers putting their money in an savings account for such a small return."

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