May
8
Rates Unchanged: More Wait and See
Filed Under Banking, Interest Rates, News
Base rates were left at 5% as the two-day meeting of the Bank of England’s Monetary Policy Committee (MPC) culminated with a decision to do absolutely nothing.
The outcome was widely expected given the MPC’s wait-and-see mindset would never tolerate back-to-back monthly rate cuts. April’s quarter percentage point cut from 5.25% to 5% was more or less the death knell for a May cut, despite MPC member Danny Blanchflower calling last month for a half percentage point cut.
Next week’s publication of the Inflation Report was where a lot of economists laid the blame for the BoE’s “disciples of dither” failing to act and cut the rate.
Hopes are now that there will be a cut in June. However, the window of opportunity to sneak in rate cuts is closing. Price inflation is expected to pick up later in the year and there are genuine concerns that second-round effects from wage inflation will also become more prominent as we approach 2009. Those are rate-rising factors.
One opinion is that you want to get rates as low as is practical now so that any rate raising that needs to be done brings you back to where you started. As opposed to leaving rates on hold for now and still having to raise them later. Of course, that assumes the Central Bank has not totally discarded its inflation-fighting persona by then.
There are also concerns being aired that quarter-on-quarter GDP growth could hit 0% or even turn negative by year end. Whilst rate cuts take time to permeate into the economy at large, you want to get them out of the way well before the economy actually looks like it is going to contract. Cutting them when real GDP is stagnant, let alone shrinking, would be a little late to avoid the damage done and jobs lost in the interim.
To be fair, cutting rates will have little impact on the underlying problems in the credit and mortgage sectors. Though, given the lack of success of whatever else has been tried thus far, a little is better than none at all.
In the current environment any reduction in the Base Rate, hopefully matched by a reduction in the rates charged between banks, will be of most benefit to those with impeccable credit.
After years where ludicrously low rates were available to anyone, no matter what their credit standing, the easy-lending era has been replaced by something much more paranoid. Under the new regime it is those who have kept their credit files immaculate who will find they have the most to gain from any cuts in rates. For those who managed their credit and avoided the worst excesses of the debtfest of the last few years, their virtuous behaviour will be rewarded. On the other hand, for those who over-indulged, and have the stains on their credit file to show for it, good deals at good rates will continue to remain elusive.
