James Daley: Cutting interest rates is not the answer

Not so long ago, a 0.5 percentage point cut in the official Bank of England interest rate would have been a cause for celebration for most people in Britain. Although, admittedly, rate cuts do tend to translate into a reduction in savings rates, most of us in property-mad Britain have much bigger mortgages than we do savings. Hence, a cut in interest rates tends to deliver us much bigger reductions on our mortgages than it costs us in lost interest on our savings.

Over the past few months, however, the traditional rules simply have not applied. As interest rates were cut by another 0.5 percentage points to all-time lows on Thursday, only the minority of borrowers (those with existing tracker mortgages) had anything to smile about. For the majority – those who are still on fixed rate deals, like me – the rate cuts of the past three months have meant nothing.

In years gone by, rate cuts would have fed through to those on fixed-rate deals, by ensuring that lower rates were on offer when those borrowers remortgaged. Over recent months the cost of new borrowing has stayed high – regardless of how much the Bank of England has cut its base rate – meaning that when those of us with fixed rates come to the end of our current deals, we'll struggle to find a new mortgage that is not more expensive.

Meanwhile, the hit to our savings rates is palpable. Since October, the Bank of England rate has been cut from 5 to 1.5 per cent – and most banks have been quick to pass these cuts on to savings customers. I'm now receiving just 2.25 per cent on my HSBC savings accounts, which doesn't even keep pace with inflation.

All this leaves me wondering why the Bank of England bothered to cut rates at all this week. While historically, rate cuts were an effective way of giving a shot in the arm to the economy, that's not the case as long as banks are unable to cut the cost of new mortgages. I'll concede that the recent cuts have been great news for the third of mortgage holders who have tracker deals. However, there's little evidence that this extra cash is being spent on the high street. Instead, I suspect many of those with lower mortgage payments have been using the spare money to pay down their debts quicker, or to bolster their savings.

Meanwhile, the sharp rate cuts have had other negative side effects. For example, annuity rates have fallen, meaning pensioners have been forced to accept a worse deal on their retirement income. Sterling has also collapsed since September – meaning travel for Brits abroad is prohibitively expensive.

Stimulating the economy is now a task that is out of the Bank of England's reach – but if it persists with an agenda of further rate cuts, then it can still cause hardship for British savers, pensioners and travellers.

The Government is now the only party with the power to turn the economy around – and now is the time to act. Helping to increase liquidity for the banks, investing in job creation and cutting taxes where necessary are all measures that can help. One thing is for sure – relying on the Bank to save the economy with rate cuts is no longer an option.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

PROMOTED VIDEO
News
Top Gun actor Val Kilmer lost his small claims court battle in Van Nuys with the landlord of his Malibu mansion to get back his deposit after wallpapering over the kitchen cabinets
people
News
Comedian Ted Robbins collapsed on stage during a performance of Phoenix Nights Live at Manchester Arena (Rex)
people
News
The actress Geraldine McEwan was perhaps best known for playing Agatha Christie's detective, Miss Marple (Rex)
peopleShe won a Bafta in 1991 for her role in Oranges Are Not The Only Fruit
News
newsPatrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
News
Robert Fraser, aka Groovy Bob
peopleA new show honours Robert Fraser, one of the era's forgotten players
Life and Style
Torsten Sherwood's Noook is a simple construction toy for creating mini-architecture
tech
Sport
David Silva celebrates with Sergio Aguero after equalising against Chelsea
footballChelsea 1 Manchester City 1
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Software Development Manager

    £40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Product Manager - (Product Marketing, Financial Services)

    £30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Day In a Page

    As in 1942, Germany must show restraint over Greece

    As in 1942, Germany must show restraint over Greece

    Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
    Britain's widening poverty gap should be causing outrage at the start of the election campaign

    The short stroll that should be our walk of shame

    Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
    Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

    Homeless Veterans appeal

    The rise of the working poor: when having a job cannot prevent poverty
    Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

    Prince Charles the saviour of the nation?

    A new book highlights concerns about how political he will be when he eventually becomes king
    How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

    How books can defeat Isis

    Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
    Judith Hackitt: The myths of elf 'n' safety

    Judith Hackitt: The myths of elf 'n' safety

    She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
    The open loathing between Barack Obama and Benjamin Netanyahu just got worse

    The open loathing between Obama and Netanyahu just got worse

    The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
    French chefs get 'le huff' as nation slips down global cuisine rankings

    French chefs get 'le huff' as nation slips down global cuisine rankings

    Fury at British best restaurants survey sees French magazine produce a rival list
    Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

    Young carers to make dance debut

    What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
    Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

    Design Council's 70th anniversary

    Four of the most intriguing prototypes from Ones to Watch
    Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

    Dame Harriet Walter interview

    The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
    Art should not be a slave to the ideas driving it

    Art should not be a slave to the ideas driving it

    Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
    Bill Granger recipes: Our chef's winter salads will make you feel energised through February

    Bill Granger's winter salads

    Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
    England vs Wales: Cool head George Ford ready to put out dragon fire

    George Ford: Cool head ready to put out dragon fire

    No 10’s calmness under pressure will be key for England in Cardiff
    Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

    Michael Calvin's Last Word

    Time for Old Firm to put aside bigotry and forge new links