creditcrunchnews

As expected, The Bank of England decided to lower the base interest rate by half a percentage point to 0.5%. This is the lowest the UK base rate has ever been and is the sixth time interest rates have been lowered since October last year in a bid to try to contain the effects of the credit crunch.

This rate cut has already been criticised by economists and organisations like the Council of Mortgage lenders (CML). The CML says that the cut will put a lot more pressure on lenders who already have tight margins and will find it hard to offer entice savers with such small rates of interest, which in turn will mean they won’t be able to then lend savers money out as new mortgages. For the same reason the cuts been criticised by savers who are barely getting any money back from their savings already so will get even less now.

Why?

What people seem to be forgetting is what the rate cut is designed to do. That is to stop people from saving or hoarding cash as a ’safety buffer’ for the recession and to spend it instead thus stimulating the economy. Also it helps out most households too who have tracker mortgages as in interest payments in most cases to lenders are minimal and in some cases, lenders actually owe the borrower every month! This is taking pressure off a lot of families in the UK who are facing pay cuts or redundancies.

Quantitative Easing

The Bank of England has another plan to help getting Credit flowing again…this is ‘Quantitative Easing’. Quantitative Easing is new to the UK and is basically where the Central Bank prints or in this age, digitally creates money from thin air. It is usually done by purchasing assets like government securities or gilts and corporate bonds. This money is then used to lend to banks to help them recover from toxic debts and be in a position to lend to house buyers, borrowers and business. The Bank of England announced today that the Chancellor, Alistair Darling, had now given them the ‘green light’ to start the process of Quantitative Easing by adding at least £75 billion for now with the provision to extend the amount to £150 billion.

These two measures should, in theory help increase consumer confidence along with kick starting the credit circulation. However, along with Quantitative easing is the danger of inflation. This is basically because there’s a lot more money about so companies feel they can charge more for things, so prices go up. Although if this does become a problem, it could be curbed later by increasing interest rates and this should reduce inflation.