Friday, 6 February 2009

Base rate down to 1 percent

OK, so yesterday the Bank of England dropped the base rate by 0.5% down to 1 percent; another all-time record of lowness. The move was widely expected, didn't spook the markets or anything and was generally a ho-hum yawn kinda move.

In fact sterling actually rallied slightly against the other major currencies because, hey, they could have dropped the base rate by more, and for another reason I'll come to in just a mo.

First we must ask: why is the Bank of England blindly sliding into the ZIRP? (ZIRP you will recall from previous posts is what America is currently enjoying - Zero Interest Rate Policy.) Reducing the interest rate hasn't in the main benefited borrowers, fixed rate mortgage-holders don't gain, variable rate home-owners gain a little if the drop is passed through - often it's not - and collared tracker mortgage-holders don't gain. Basically it's just the uncollared trackers who gain, and they are in a minority. Meanwhile savers lose out big time. And there are seven times more savers than borrowers in the UK. (Although, thanks to the generosity of foreigners, not seven times more savings than borrowings.)

Well it seems ZIRP is a step on the road to quantative easing, which is where we all suddenly remember money is just bits of paper which can be printed at will. That's where the Bank of England is headed. They want to get printing but if they print before reaching zero interest rates all the money they print will get deposited back with them so the beneficiaries can get some free profit. They don't want that; they want the cash being spent in the High Street or lent to house buyers. So it's ZIRP, then print.

So we come to the reason sterling gained a little yesterday. The markets saw that yes, they're going to devalue sterling by printing, but not quite as soon as some were thinking. Slicing half a percent off a month means we shouldn't be printing until early April; Armageddon postponed - markets happy.

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