News John on 06 Feb 2009 01:55 pm
Historical Interest Rate Cut
Yesterday the Bank of England Monetary Policy Committee once again cut interest rates by 0.5% to a record low of 1%. It’s the 5th interest rate cut since October when interest rates were 4.5%.
The cut is great news for borrowers with tracker mortgages, or borrowers whose lenders choose to pass on some or all of the interest rate cut, but not such good news for savers. On the other hand it’s the borrowers that we really need to help out at the moment, reducing the burden on them (both consumers and businesses) will help to stimulate the economy. Whilst savers provide little benefit to the economy and may in fact - much as it pains me to say it, in times like these, harm it by saving.
I predicted this cut in interest rates last week, in my post Bank Of England Base Rate Predictions - not that it took any great insight to do so, and unfortunately, in light of the continuing state of the economy, I think our interest rate predictions remain valid for the forthcoming year. So if you’ve got a significant level of savings, it’s perhaps time to consider some alternative strategies for your savings and investments.
on 06 Feb 2009 at 8:52 pm 1.cornish dragon said …
Interesting thoughts there John to say the least!
Just one tinsey problem…. borrowers can only borrow if savers ..well you guessed it…..save!
This is part of the reason why we are in this mess.
This dire political manipulation of the interest rates is appalling news (although I personally will benefit in the short term).
One of many great quote about the “credit crunch” is Mish’s “You can’t mend a broken dam by adding more water” and Dr Ron Paul … “the best cure for a recession is a recession”.
It certainly is NOT the “borrowers we really need to help”. Quite the reverse by destroying careful peoples’ hard worked for savings and pensions plans (their future dreams) and rewarding profligate borrowers we have undermined the whole work ethic of our society…
Although it really doesn’t matter that much now any way just learnt that the worldwide derivatives market waiting to implode is $100 trillion of worthless fiat junk bonds, level 3 “assets” (?!)
cdo’s and “off book” “investments” …..
(apparently equal to $100,000 for every person on the planet.. so not much really !)
….more fun and games coming soon ;)
Keep smiling
Austrian Dragon
on 07 Feb 2009 at 12:09 pm 2.Tristan said …
There is some truth in the fact that lenders need savers to save money so that they can lend money out, however, the banking regulations in this country (UK) and elsewhere throughout the world are such that the capital ratios are in the region of 10:1 i.e. for every £10 lent out in mortgages, there must be £1 being saved, the other £9 can be borrowed on the wholesale markets, which is what got the banks into this mess in the first place.
The borrowed huge amounts of “cheap” money at 3-4%, then lent it out to un-credit worthy individuals at 7-10%, making a very healthy 3-7% margin on 90% of the money lent out, and a much smaller margin on the money they borrowed from savers.
Regardless of how much money being saved by the frugal in our society, the banks aren’t lending at anywhere near the full capacity. Which is probably why the savings rates are so poor currently, as the banks aren’t making the big margins on money borrowed from the wholesale money markets anymore.