BOE hints at interest rate cut

ILW

I would love to have a bit of serious deflation.

Masomnia

ILW wrote: »

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

Exactly my point.

grizzly1911

MacMickster wrote: »

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.

Low rates don't necessarily help the borrower in the long term as savings they may be making will eaten up by inflation on items of consumption. When rates start recovering they will still not be able to afford it whilst wage inflation remains near flat. For swathes of the public sector I can see real incomes in decline for some time too.

wymondham

I have the impression they sit at a round table when discussing these things and when it comes to blame they all point to the person on the left!

chucknorris

grizzly1911 wrote: »

Low rates don't necessarily help the borrower in the long term as savings they may be making will eaten up by inflation on items of consumption. When rates start recovering they will still not be able to afford it whilst wage inflation remains near flat. For swathes of the public sector I can see real incomes in decline for some time too.

I'm 29k per year better off due to the low base rate, only a tiny fraction of that is 'eaten up by inflation'.

gagahouse

MacMickster wrote: »

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.

Which money supply are you talking about, base money (central bank reserves) or broad money (commercial banks credits and debits)? QE increases central bank reserves which are used to purchase Gilts which increases banks' excess reserves. Banks cannot lend out required or excess reserves to you or me or the corporate sector, it can only loan them to other banks. It can only raise additional loans against those additional reserves but to do that it has to find a willing and creditworthy borrower first. If it does, then the loan created by the bank creates an equal offsetting deposit. If that happens, then you can say the money supply has increased.

The evidence is despite all the QE, money supply is still falling in UK (c.f Generali's posts) - if QE was designed to do this then it is failing miserably for some of the reasons I've explained previously.

Figures released by the Bank of England on Wednesday showed that the UK's broad money supply, M4, shrank by 5pc in the past year to a new record low. The scale of the decline led to speculation that the Bank might restart quantitative easing (QE) next week to prevent the recession deepening, economists said.
The collapse in the money supply was driven by the banks, which continue to scale back their lending to businesses, the data showed.
Vicky Redwood at Capital Economics said: "The overall broad money figures continue to go from bad to worse... The monetary indicators as a whole point to the need for further quantitative easing."
The drop has come despite the Bank's efforts to boost the stock of cash in the system with £325bn of QE stimulus. However, banks and investors are hoarding the money in safe assets, such as Government gilts, rather than injecting it into the economy.

http://www.telegraph.co.uk/finance/economics/9242042/Record-collapse-in-UK-money-supply-blamed-on-banks.html

DervProf

chucknorris wrote: »

I'm 29k per year better off due to the low base rate, only a tiny fraction of that is 'eaten up by inflation'.

That's good for you, but I doubt this applies to the majority of people in this country.

joe_blotts

Question:

Is it true that the BoE "prints money'(ieQE) to buy government Bonds and the Government then spends that money on it's various social programmes and if that is the case isn't that inflationary as that money goes straight int the economy as public servant wages etc? I think that's right but not entirely sure could someone clarify pls

purch

joe_blotts wrote: »

Question:

Is it true that the BoE "prints money'(ieQE) to buy government Bonds and the Government then spends that money on it's various social programmes

No it is not true.

purch

If it was true (the the BOE prints money and gives it to HM Gov to spend) then we wouldn't have a deficit or the need for "austerity".

On the other hand, if that is what happened the currency would be close to worthless and a loaf of bread would cost £ 45........err no £ 46........oops £ 48 :eek:

Mr. Gordon Agahouse explained what happens rather succinctly earlier in the thread BTW.