Interest rates don’t matter any more

Everyone seems excited about the expected Bank of England interest rate announcement, but in reality it doesn’t really matter what the bank says.

The Monetary Policy Committee will announce this month’s interest rate – but as a tool for moulding the economy, it’s now useless and needs consigning to the back of the drawer in favour of new methods.

Even if the rate goes down to 0%, the likely effect on lending is zero.

The problem is not the cost of borrowing but getting the money.

The banks won’t lend, so credit that individuals and businesses planned to access now just isn’t there and probably won’t be for a long time.

The economy has three problems:

Mortgages for home buying have dried up. Buyers are looking at 25% deposits to get a mortgage in a market value when the value of homes is decreasing daily.

Lenders are not willing to take the risk of lending in a falling market until they know its bottomed out.

Banks are looking to get cash back from small businesses. Small businesses scapegoats. Calling in overdrafts and loans from a 1,000 small businesses is the same as driving one bigger name to the wall.
The result is the same damage to jobs and prosperity, but because the closures and job losses are off the media radar, no one gets a bad press

Finance is drying up for big business because however low the interest rate goes, the banks can’t or won’t lend to each other because they don’t know how risky assets on the other bank’s balance sheets are.
More big names will be forced in to liquidation because they can’t roll over commercial paper – the short term loans that give them cash flow to pay staff, rents and buy stock.

Rather than dance a jig about falling interest rates, these are the problems that really need addressing.

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Tags: Bank, Banking, Economy, Interest Rates, Money, Mortgage, Mortgages, Savings