BOE hints at interest rate cut

Graham_Devon

The Bank of England yesterday signalled that a further cut in interest rates could be on the cards as it battles to drag the country out of recession.

The monetary policy committee this month unleashed a third round of quantitative easing – dubbed QE3 – ramping up the money printing programme by £50billion to £375billion.

But minutes of the meeting published yesterday showed it discussed an even bigger extension of the scheme to £400billion as well as an interest rate cut beyond the record low of 0.5 per cent. It said that although a rate cut to 0.25 per cent or even lower was unattractive now it may be required ‘in time’ depending on the impact of other measures designed to kick-start the recovery including the £80billion ‘funding for lending’ scheme launched last week.

Not sure what 0.25% will actually do, may aswell go the whole hog and cut 0.5%.

However, its now in the minutes, and being discussed. More QE also discussed.

Commentators state that a rate cut would be welcome for some borrowers, but would infruriate savers.

http://www.thisismoney.co.uk/money/markets/article-2175614/Bank-England-slash-rates-kickstart-economic-recovery.html

ILW

I get the impression that the BoE are no more competent than your average bloke down the pub.

They happily sat back and watched the whole disaster happen, and it is now looking lke the were complicit in much of the wrongdoing.

shortchanged_2

Great news, that'll do it. I see this being as successful as the Sinclair C5.

Masomnia

I still don't understand why we print the money hoping it'll get lent out and then pay banks to keep it with the Bank of England. It makes no sense.

If we want to them to lend the money in any sufficient quantity surely we need 0% or even negative rates on deposits with the Bank?

Dan:_4

Got to laugh.

I remember in back in 2009 it was a popular believe (on this forum only) that the ultra low intrerest rate was very temporary.

The insults I got for suggesting otherwise.......

ILW

Masomnia wrote: »

I still don't understand why we print the money hoping it'll get lent out and then pay banks to keep it with the Bank of England. It makes no sense.

If we want to them to lend the money in any sufficient quantity surely we need 0% or even negative rates on deposits with the Bank?

Why would anyone deposit at 0% when they can get better elsewhere?

lisyloo

Why would anyone deposit at 0% when they can get better elsewhere?

Do you mean they can get better savings rates at other banks?
Or do you mean why would they save when it's only 0%?

ILW

lisyloo wrote: »

Do you mean they can get better savings rates at other banks?
Or do you mean why would they save when it's only 0%?

The first.

Just wondering how relevent BoE rate is anymore. Rates offered on the high street seem to bear little relation to base rate. BoE does not have the credibility it used to.

MacMickster

The lower that the BOE rate goes, the worse that it will be for borrowers trapped on their lenders' SVRs in the long run.

The margins between base rate and SVRs are now very wide, as lenders have broken the links between base rate and their SVR.

I strongly suspect that once interest rates do begin to rise then banks will feel that it is only fair to increase their SVRs in line with the base rate, maintaining their current margins.

gagahouse

Masomnia wrote: »

I still don't understand why we print the money hoping it'll get lent out and then pay banks to keep it with the Bank of England. It makes no sense.

If we want to them to lend the money in any sufficient quantity surely we need 0% or even negative rates on deposits with the Bank?

The BOE is not printing money and handing it out to the banks, they are asset swapping the bank's Gilts for central bank reserves. So all it does as far as the bank is concerned is transform the maturity of the bank's assets from near cash to cash. It does not change the liquidity profile of the bank as the bank can always sell its Gilt for cash, borrow reserves from another bank or repo its Gilt with the BOE in exchange for reserves without the assistance of the BOE.

Even if the Gilts are bought entirely from the non bank sector, the net effect is the same, no new money is added, just the maturity of the household and corporate sector's holding is changed. Nor does it necessarily mean that now they hold cash instead of a bond that they will spend it. If you invested in a bond and the BOE buys it off you, you are not going to automatically spend it as if that was your intention you wouldn't have saved the money by buying the bond in the first place.

A bank can only lend to a willing and creditworthy borrower - neither of which are in great supply. That is why the banks leave the money in excess reserves as it pays an interest rate. Lowering the deposit rate to 0 or negative doesn't change the willingness or creditworthiness of borrowers. It would also prompt banks into a cash arbitrage trade - if the vaulting fee for holding cash is less than the charge on holding it as excess reserves, then they will convert these balances into cash and deposit it in their own vaults. They are reducing their inventory of excess reserves from which they can make loans so the idea that negative rates will automatically increase lending is IMO false.

QE is designed to make borrowing more attractive to the borrower by driving down market rates. By continuing and expanding the size of QE, it also absorbs the supply of bonds held by the bank and non-bank sector which in turn will buy the supply of new debt being issued from the govt.

MacMickster

gagahouse wrote: »

QE is designed to make borrowing more attractive to the borrower by driving down market rates. By continuing and expanding the size of QE, it also absorbs the supply of bonds held by the bank and non-bank sector which in turn will buy the supply of new debt being issued from the govt.

No! QE is designed to increase the money supply in the UK to prevent a ruinous period of deflation. Over the last few years people have been paying down their debts, and as a consequence reducing the money supply in the UK, which would in turn bring about deflation. This would then effectively increase the amount of government debt in real terms.