Some wider reaction to the latest interest rate cut

Posted on 9 January 2009 by Drew

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BBC economics editor Hugh Pym said the Bank was now being more cautious after the sharp cuts in interest rates in November and December. "There is a hint in its statement that it may sit tight for a while to assess the impact of the big reductions over the last couple of months," he said.
Hetal Mehta, senior economist from the Ernst & Young Item Club, said the cut to 1.5% was "appropriate", but that the Bank should not stop there."With survey data continuing to languish at record lows - manufacturing and services surveys in the past few days have confirmed that activity is falling sharply - we see no reason for the Bank to hold back in cutting interest rates to 1% or below in the coming months," she said.

Manufacturers' association EEF said the move was "too timid", and that the Bank should have cut rates further.  

Institute of Directors chief economist Graeme Leach said the MPC's apparent caution in not cutting rates further this month "highlights the uncertainty over what effect the existing monetary and fiscal stimulus will have on the economy". He added that there also seemed to be uncertainty over "whether or not the Bank of England should go nuclear with limited printing of money or thermonuclear with extensive printing of money".

Societe Generale economist Brian Hilliard said the pound's recent sharp fall was likely to have played a part in the Bank's decision to cut rates by no more than 0.5 percentage points.

However, Sainsbury's chief executive Justin King said that interest rate cuts are failing to drag the UK out of recession . He makes the point that it's the dearth of lending by banks  which is the bigger problem  rather than than the cost of borrowing. "It is up to the Bank of England to do what they think is right, but our suppliers are saying that what they have to pay to borrow is not the issue, it is that there is no money being lent in the first place."  He added that that, "The banks are doing what is required of them by the Financial Services Authority, which is to lend less money and bolster their balance sheets. The Government needs to focus on improving liquidity."

An increasing numbers of commentators are questioning the repeated interest rate cuts as home owners are saving, not spending, the money they gain. There's a growing camp saying that it's time that policymakers (i.e. the Government) started looking at ideas that actually might make a difference, such as suspending stamp duty (a cause championed by Charcol for some time now) to stimulate the housing market.

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