Thursday, November 6, 2008

Drastic Measures for Desperate Times

The Bank of England were widely expected to cut interest rates today. But, the decision to cut rates by 1.5% 150 basis points, took many by surprise. It is what the economy needs (see: why interest rates need to be cut), and in a way makes more sense than cutting rates by 0.5% for the next 3 consecutive months.

As if to confirm the Bank of England's decision to cut rates, house prices fell by a huge 2.2% in October. It means UK house prices have fallen to 2005 Levels

Talk about a rollercoaster - This graph of UK House prices would give anyone Vertigo

What will Happen now?
  • Banks are unlikely to pass the full 1.5% cut onto consumers, but, they will have to pass, at least some of it on.
  • Lower interest rates should help those who are struggling with mortgage payments. It will limit home repossession.
  • It may encourage higher consumption and investment, or at least it may moderate the falls in consumption and moderate the rise in unemployment.
  • The Pound will be weaker as the UK is less attractive to save money
  • Savers are worse off.

However, the huge interest rate cut will not solve the underlying problems; the economy still has several months of slow / falling growth to anticipate.

See also: Video discussing different Policy Options for Economies in recession (posted today)

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