Thursday, 4 August 2016

Base rate down by and to 0.25%

Unbelievable but true, the BoE has just reduced the base rate. The graph now looks like this...



If you saw that in a hospital you'd say that patient is definitely dead. And that's not all, the Bank of England has announced additional measures:

  • £60bn more QE taking the total to £435bn - so about a quarter of our two trillion national debt  is funded by 'printed' money.
  • Another 'funny' £10bn will be used to buy corporate bonds to pump money into the country's biggest companies.
  • There will be a $100bn funding scheme for banks which is conditional on them passing the base rate cut through to customers - ie, banks get bribed. This is like the old Funding for Lending Scheme only with extra conditions. The FLS is the main reason savers get such a bad deal - the banks don't need their money, the BoE is printing money and giving it to the commercial banks. (Alright, lending it, strictly speaking.)

The whole plan seems to be to pump up indebtedness even further. The plan relies on the premise that people will take on as much debt as they can afford so debt needs to be made more affordable to keep the economy moving.

The plan is of course massively inflationary, but the inflation will mainly occur in asset prices (stocks, bonds, houses) which are not counted in the indexes so the BoE will be able to claim low inflation has been maintained.

And this is only the second last cut. Mark Carney, guv'nor of the BoE reckons he can squeeze out another cut down to just above zero before he is done.

Which does raise the question: can they go negative? The answer is: probably not. In theory it is doable, there are countries with negative rates, but you also have to consider what the public will wear. Applying negative interest to bank deposits could trigger a bank run as people decide just to keep their cash at home. After Northern Rock no one in government has any appetite for that.

Read the inane words of Mark Carney here.