Why?

The MPC have today, as expected, reduced the Bank of England base rate still further.

What are they expecting to happen?

With rates already almost uniquely low, will a further reduction make any difference to those who want to borrow? The problem is availability of credit or funds, not its price. There will be, admittedly a small reduction in borrower's costs in the case of business borrowing, but not enough to reduce prices or increase profits significantly.

It will almost certainly not mean an increase in saving - this is no incentive to increase saving, or at least depositing with those institutions which need deposits in order to make advances.


This is a transfer of income from savers to borrowers. The latter will pay less on their mortgages, but given uncertainty and that many have debts in other directions, it is unlikely that they will go on a spending spree.

All in all, it is difficult to see what promotion of economic activity this will make. In so far as the lower rate feeds through to the bond market, it could put pressure on sterling and give our exports a slight advantage, but as foreigners are withholding spending at the moment this will surely have little effect. The government also has to maintain overseas held debt, and this will be more difficult, even if it is cheaper.

The message it sends is that the Treasury is becoming more desperate, that nothing seems to be working. This will not do much for confidence.

So it looks like "easement" will be brought in as the final fling, unless somehow confidence among consumers and producers can be raised. "Toxic Bank", purchase of toxic debt, loan guarantees have not yet been tried, or given time in the case of the latter. Why not give a boost here if the only option seems to be a large government splurge.