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The one percentage point cut in rates was entirely the right thing to do, given how sick this economy has become.
The Bank of England had no hesitation in cutting rates to their lowest since 1957 and the joint lowest ever because it has at last woken up to how bad things are out there. It has now reduced rates from 5% to 2% in the space of just two months.
Rates should never have been as high as 5% in early October, but at least they have now been cut to more or less where they should be. Witness the latest house price numbers from the Halifax – a drop of 2.6% on the month – the biggest since September 1992, and a 16% annual drop, the biggest since the Halifax started counting in 1983.
Moreover, car sales were down 37% in the year to November, reports the Society of Motor Manufacturers and Traders. Those are all big falls and come on top of record lows in all the surveys this week of the manufacturing, construction and services sector.
The monetary policy committee's statement shows a committee very worried about the prospects for the economy. It points out that in spite of all the measures thrown at banks and the money markets, credit remains tight and difficult to obtain. Thus, it consider there is no option other than to keep cutting the price of credit, simply to ease the burden on those households and businesses that already have credit. The economy is in danger of freezing up, and rates cuts provide a bit of badly-needed lubricant, as does this week's cut in VAT.
This is not about reinflation of house prices or consumer borrowing; this is about preventing the whole thing coming off the rails, which it is in danger of doing. Confidence needs to be restored everywhere – hence the government's announcement of help for households that fall into difficulties with their mortgages. There is a general danger of a complete loss of confidence. Confidence and credit are the lifeblood of modern economies, and both are in dangerously short supply right now.
Will the Bank cut rates further? You bet. Probably to 1%, as soon as next month.
Worries about that stoking inflation are for another day. The worry now is deflation and that has to be avoided at all costs. And, as some commentators are already suggesting, it's not beyond the bounds of possibility that rates will go all the way to zero.
- Interest rates
- Interest rates
- Bank of England
- Economic policy
- Recession
- Mortgage lending figures
- Mortgages
- House prices
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