UK Bank Rate Cut Again, Why?

08 January 2009 - UK bank rate cut again, why?

So, as widely predicted, the Bank of England’s MPC cut interest rates today by 0.5% to reach an all-time low of 1.5%. Given what has actually happened since the last cut, it is hard to fathom why. The last cut did not kick start the economy and this further slice seems similarly unlikely to. As has been discussed before, it is obviously not the price of money at issue but rather the availability of it. Also, there has to be a very real danger of rampant inflation in the near future if, as appears likely, the pound weakens further or at any rate does not strengthen again. Imports are sure to put up factory gate prices for the home market. Thirdly, and again as opinioned in this diary before, why reward the spenders and punish the now largely deflated savers? It just makes no sense.

An organisation called Fitch Ratings has warned that Britain’s public debt will explode to almost 70% of GDP by the end of 2010. If this occurs, the UK will be one of the most indebted states in the industrial world. A spokesman said that the danger is that it will become increasingly hard to raise enough funds in the global bond markets to cover bank bail-outs and big budget deficits. There is evidence of this being a more immediate issue than might be thought. Yesterday, Germany failed to sell a full batch of its bonds with investors taking up just two-thirds.