In the end, the massed ranks of business lobbyists, economic commentators and politicians got even more than they had been shouting for. The Bank of England yesterday cut interest rates by 1.5 percentage points, the biggest single reduction in 27 years. The base borrowing rate now stands at its lowest level in half a century.
The size of the cut is testament to how concerned the Bank's Monetary Policy Committee (MPC), which decides rates, has grown about the health of our economy. The outlook has deteriorated drastically over the past month. Consumer spending is falling. An increasing number of businesses are in trouble. Unemployment is on the rise. And house prices continue to slide. The global economy is running into trouble too, meaning there will be no salvation from foreign demand. This hefty rate cut is a bold attempt by the MPC to give our over-borrowed economy a break in these wretched conditions.
Loosening monetary policy comes with obvious risks though. The cut in rates will weaken the value of the pound on international exchanges. Investors tend to want to invest in currencies and countries which promise a higher, rather than lower, rate of interest. If enough foreign investors sell sterling, Britain could find it a struggle to finance our fast-rising levels of public borrowing.
And we cannot even be certain that cutting rates alone will be enough to deliver a stimulus to the economy. These rate cuts are far from certain to be passed on to the consumers and businesses which so badly need them. The private banks are in such a state of fear over their own futures that they still dare not lend on a normal scale to each other, let alone their customers. This week, three high street lenders withdrew their tracker mortgage ranges in anticipation of a cut. This does not suggest an industry itching to pass on the benefits of lower interest rates. And the example of the US is not encouraging either. The hefty rate cuts by the Federal Reserve in the past year have failed to make a big impact on the American economy.
Then there is inflation. We cannot lose sight of the fact that it is still running at 5 per cent, well above the Bank of England's target rate. Cutting interest rates could, in theory, let inflation off the leash at the same time as growth dries up, putting our economy in the worst of both worlds.
All these were good reasons for the MPC to be cautious. But the dangers of keeping rates on hold were plainly greater. Inflationary pressures have been receding in recent weeks as the price of oil and food has come down. The greater danger is deflation. And the case for attempting an economic boost through cuts is compelling. We are entering a potentially major recession and cutting interest rates is one of the few levers open to the stewards of our economy. It would have been irresponsible for them not to have pulled it at such a dire time.
But we must be realistic. Nothing will avert recession now. And even if these cuts are passed on, they will take at least a year to feed through to the economy. The best that can be hoped for is that this sort of monetary loosening now will make the downturn shallower, shorter and less painful.
That brings us to the final justification for these cuts. It is not just about credit, but confidence. The cuts are a sign that monetary authorities will do everything in their power to stop the economy running over the edge of a cliff. We now need to cross our fingers and hope this injection of goodwill and credit has the required effect.Reuse content