MPC Decision January 2009

The Bank of England has announced that interest rates will drop to 1.5%, the lowest level in its 315 year history. editor Clare Francis looks at the reasons for the decision...

Clare Francis: It’s not only the air that has a chill to it at the moment. There’s been little in the way of good news on the economic front so far this year and the Chancellor, Alistair Darling, has conceded that the recession is likely to last longer than he and the Government anticipated.

Recent figures from Halifax and Nationwide revealed house prices saw their biggest ever annual fall in 2008, with the average property now worth 16% less than this time last year. And there are already indications that forecasts of significant job cuts this year will prove to be accurate. Marks & Spencer announced that it will be cutting more than 1,000 jobs and there are warnings that as many as 135,000 shop workers could lose their job over the next 12 months as retailers struggle to cope with the downturn in consumer spending.

Against this backdrop it has therefore no surprise that the Bank of England has decided to cut interest rates again. The country’s official rate of interest is now at its lowest level since the Bank was founded in 1694.

This months reduction was widely expected by the City. The question now is how much further will rates fall.

One of the main reasons behind the recent strategy of aggressive rate cuts was that it would get consumers spending again – their monthly mortgage payments would fall giving them more spare cash each month. In turn this would help kick start the economy. However, many haven’t felt the full benefit of recent rate cuts either because they’re on fixed rate mortgages, or because  their lender hasn’t passed on the rate cuts in full.

Vox Pop: "We’ve got a price-fix on our mortgage, so it’s not done anything anyway.”

CF: Others haven’t benefited because they’re savers rather than borrowers:

Vox Pop: "I’m a saver so in fact if anything I’ve lost. I’m very, very worried about the economy at the moment.”

CF: And because of the recession, even those who have benefited in full from the recent rate cuts aren't spending the extra cash they've got each month. Instead they're either puttng it into savings or using it to pay down other debts.

Vox Pop: "I think as usual the bank of England is behind the curve – America cut interest rates much faster than us so we’re behind the game and a lot of damage was done. They’ve been cut, which is beneficial, so its put money back into peoples’ pockets, but I think the delay in doing it has put a lot of fear into people and therefore what money they have got, they’re keeping rather than spending, which makes the situation worse.”

CF: Some analysts think it’s still too early to have seen the full impact of the recent rate cuts filter through to the economy, but there is another school of thought which thinks that further rate cuts aren’t what is needed to get the country out of recession. Many see the fact that banks still aren’t lending to one another as being the main factor thats now crippling the economy. If a growing number of MPC members adopt this point of view, this months rate cut could be the last we see for a while.

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