The significant cut in BBR was a welcome move by the BofE and probably for the first
time since this crisis began the MPC look like they are getting ahead of the curve.
Having a central bank that appears to be in control of events breeds confidence
and this is something that has been lacking for well over a year.
As I said in last week’s column BBR, as it is being cut will have a lesser impact
on the cost of borrowing than some may think. It is great news for those of us on
trackers and the 10 or 15% of customers on SVRs where the lender passes on the cut;
but new borrowers may not see the benefit so soon. Libor continues to be very sticky
and is still some 1.4% above BBR against a long term average of 0.2% and I dear
say that retail deposits will stay relatively expensive in the short term. This
will make it difficult for lenders to pass BBR cuts on to new borrowers. Indeed
some credit card providers have been putting interest rates up this week. The Bank
of England base rate has dropped from 5% to 3% since May. But over the same period,
the average annual rate for credit cards has risen from 17.2% to 17.6%.
Talk in the City is that further cuts are being planned in and the seemingly impossible
0% BBR is for the first time being muted. The financial crisis in Japan in the 1990s
that lasted for over 10 years showed the World’s central bankers that small financial
stimulus do not have the desired effect and that early and dramatic moves are much
more likely to succeed. I applaud the MPC for taking a risk that most of us believed
it was incapable of.
Even with these moves the Economy is going to contract in the fourth quarter and
we will then have to finally accept that we are in recession. The coordinated moves
by the Worlds central banks may still mean that we have a V shaped downturn rather
than a much more painful and long lasting U shape. Once we start to feel like we
have reached the bottom of the cycle the market will start to gain confidence, this
is most likely to happen when the Halifax and Nationwide Indices start to flatten
out. We may then see the return of more normal Libor spreads which in turn will
mean more liquidity to fuel growth.
