Βι¶ΉΤΌΕΔ

As a lot of manufacturing industry has moved abroad where it is cheaper, what are we supposed to export? I don't see how you can export banking services. And as most of the stuff we used to make and sell in-house, as it were, is manufactured abroad, we are importers by force and so will be forced to pay more for the stuff we manufactured abroad to make it cheaply.

Problem is we don't produce anything so that we can export our way out of a recession, the only thing we have got going is the City and even that is built on hot air.

The only sector that benefits US exports is the Military Industrial Complex. The amount of weapons and related industries that come out of that country is phenomenal.

What will help our economy is the vision of Ron Paul.

He would return the gold standard - the dollar would be worth something again. Scrap the WTO as it curtails free trade,and reduce the size of american spending.

Also, lower interest rates drive consumer spending - which is driving inflation and could destory our economy.

He would have never went to war - and if you follow his logic, 9/11 could have been avoided.

I implore you to report on this man. An isolationist America? Its monumental.

Evan, where does energy fit into interest rate decisions? Although one can (and should for climate reasons alone) reduce domestic energy cost slightly, for the majority of people it's not an option. For one example, if the winter turned really cold and energy use soared, would the BofE think that inflationary? Surely the amount of money spent keeping warm and out of the dark is not a discretionary purchase for most people. Some economists describe home energy use as analagous to taxes, a "tax on civilisation". Surely the bank increasing interest rates because energy prices are going up would be just as mad as increasing interest rates because council tax or mortgage payments went up...

As for not "producing" anything (earlier comments), I think you'll find that Britain is an expert in creating knowledge, which is in fact a very valuable commodity, and is globally marketable. Furthermore, the main reason for the loss of our manufacturing base was the relatively high cost of labour and land, not from a lack of skill.
If it costs less to live in Britain as a result of lower interest rates, then workers will be able to discount their salary demands by an equivalent rate (or lower), thereby possibly increasing the incentive for a re-emergence of a local manufacturing industry. Toyota has already proven that it is cost effective to operate in the UK - their Burnaston plant is now on a par with Toyota’s manufacturing plants in Japan in terms of productivity and efficiency.
Interest rates are what they are. Adjusting them to suit a particular economic sector seems ludicrous. The bank of England should care VERY MUCH as to whether they should adjust an interest rate which is fairly representative of our recent past and present economy.
This is of course my personal opinion.

A quarter percent cut in interest rates on a Β£ 100,000 mortgage would just about cover the increase in the elctricity prices coming up for the heavy Q1 heting bill.

It won't cover increases in gas prices, council tax, petrol in our cars or the price of bread or milk.

A simple cut in interest rates won't cut the mustard I am afraid.

Nick G, Post 4, you have to consider that much energy use is infact discretionary, like flying abroad to go on holiday or choosing to take a job that requires you to drive 100 miles to work and back. Increasing demand from the airline industry and road transport has a direct effect on oil prices and therefore (through various mechanisms) the cost of the natural gas that we use to heat our homes. By raising rates the BoE can slow the economy and stop us spending so much money on frivolous trips abroad or reduce the creation of job opportunities that require gratuitous use of the private car, thereby reducing demand for energy and the price that we pay for it. That said, the rising cost of energy is a global phenomenon so perhaps my example isn't a good one! I wonder if the Fed's agressive rate cutting in the US to head off recession will result in more inflationary trouble in the future, for us as well as people in the US.

Evan Davis continues to bang on that we can avoid a recession by simply exporting more goods abroad and sites America has an example.America is a manafacturing superpower we are not, for ten years this New Labour government told us we dont need a manafacturing sector we are now a service and banking economy with high tech skills! Who needs Steel,Coal,Ship building and car maufacturing when we have a consumer led economy. Evan please dont think exports are going to get us out of this Gordon Brown created mess after all we are a high tech economy!

Prices or wrists?! Because obviously price cuts are equivalent to suicide. That's a terrible parallel and an abuse of the weakness of our language. The aggression inherent in slash is supposed to be directed at competitors, not inwardly. To be fair, it can damage a business to under-price but nevertheless the concepts are very different in scale! On the subject of business investment, it seems to me that businesses should shift their focus from expansion to efficiency. If the market is going to shrink, then profit margins and costs should shrink too. It might be helpful to look at what seems to be causing the slowdown: Correction for over-pricing of houses and excessive use of loans, and rising energy prices. If this is just a correction then people should just expect lower profits for a bit as a natural rebound, and if its just energy, then people should adjust their behaviour to raise the importance of energy efficiency. But then there may be other causes I don't know about. The other trouble I can see is if all countries try to play the export game, as they seem to be at the moment. How is it actually supposed to work, and can it work when everyone is doing it? To me export led growth appears to just be good old specialisation. Its not true to say that we have no productive niches, but its often tricky to know which ones they are!

You mention we don't neccessarily want consumption promoting growth. Why not? How else do you expect growth, through investment and exports? Investment won't flow if there is no prospect of consumption, and as you point out, lower rates improve our net trade position.

I also find your arguements contradictory. You say that lower interest rates won't assist the economy. Yet isn't it a year long increase of interest rates that has helped us into this position? You argue that if house prices fall, so will consumption so interest rates have no effect.

This is a counter intuitive statement. House prices have come under pressure because of interest rate rises. Falling interest rates mean funding of mortgages become cheaper and reverse this effect. Certainly there may be a lag but the net result is the same.

So you say the economy is possibly doomed and the BoE will have no effect. So, reduced mortgage payments, reduced credit card payments, and supported economy, improved business outlook from reduced interest rates will have no effect on the economy?

Some of your pieces are completely strange!

"And we needed consumers to do that [borrow and buy] in order to soak up the huge supply of manufactured goods coming into the global market from China"

Maybe you'ld care to explain why we needed this to happen? Would we have been in a worse position if we'd instead been more protective of our own economy? Might perhaps we not have arrived at the situation where average house prices are 250% above the real economic cost of construction? Could it have been possible that we wouldn't have the entire banking sector sitting on piles of dubious debt - dubious because it's low-risk status is dependent entirely on property prices not falling?

I appreciate, in the brave new 21st Century, that everything's a positive, and it's bad form to be anti- anything, but surely a case could be made for allowing us to restore anticipation to the decision-making process.

Why are we always looking at life in terms of consumption. It's all wrong. The world and its resources are meant to work for us as human beings, we are not here to be consumers of everything for business.

If people stopped consuming and buying new things all the time just then maybe we could save some precious world resources and people there probably wouldn't be such a pension problem or asset bubble problem.

The whole banking and capitalist system is broken and things are not going to be fixed from within.

Interest rates also affect annuities and therefore the amount of pension that a fund can buy. Lower rates mean that more cash is needed to buy the same income when rates were higher. For people like me who're looking to retire soon, the downward drift of long-term interest rates is most unwelcome. Especially at a time when the prospects of rising inflation are growing. For emmployers, falling annuity rates mean that they'll need to put more aside to meet their superannuation costs, which reduces profits and the cash available for investment in their plant.

So, falling interest rates are not necessarily good news!

Evan,

Can I offer outline common sense ?

Personal Unsecured Debt reported at still over Β£3 Trillion, property prices stalling, none discretionery household bills rising, transport and fuel bills rising, economy slowing with potential job losses; do you and Mr Hawkins believe that Joe Public will go on a High St shopping spree if interest rates drop by any fraction of One%.

I feel for the younger generation and their families in 2008 for the way they have been 'conned' by the financial punters and the 'feel good factor' induced by a government, Brown, crazed on the power of their own financial incompetence.

The quality of prudence may eventually re-emerge in the next 2 years, if not we are sunk.

Falling interest rates cause inflation.
The quarter percent interest rate drop has resulted in a 5% devaluation of Stirling against the Euro. Put another way, a large component of our energy and most of our food is imported and therefore a fall in the value of the pound pushes up the price of basic goods.

My suggestion is that:
(1) Interest rates are raised to promote savings and decrease inflation
(2) At the same time first time property buyers are given massive tax relief.

This course of action is the only option if we are to avoid the horrors of out of control inflation that Germany and Russia experienced in the not too distant past.

The economy is in trouble and the signs seem to be that it is going to continue downhill for the foreseeable future . So what circumstances are going to change to reverse the trend ? There has to be a tipping point at which the cycle changes direction, and if interest rate reductions don't do it , then what does ? Please enlighten me .

I'm sorry Mr Davis, but you have to go down as yet another, tiresome, all too predictable, 'bought and paid for' rep. of the vested interests, primarily the City bankers, in the overbearing lobby for urgent interest rate cuts to save skins.

I'll give you, that at least you dress it up in apparent, reasoned out economic argument, but ultimately, like the hired guy for the British retailers thing, you're just another pest piling on the pressure for the 'independent' Monetary Policy Committee to do the 'necessary' for the big banks on down. What's the matter? Don't you trust the august members of the MPC to see, hear and decide for themselves? Could it be that, the damn fools had the impertinence to not do as they were 'instructed' yesterday? Come on, at least put your cards out on the table for everyone to see. Oh, and I especially liked your penultimate paragraph, with the use of "probably" thrice - neat mental-coaching. So that's it then, the great 'to cut or not' debate and decision comes down to "ah well, it's probably right; may as well you know; no point being a stick-in-the-mud; etc.,etc....

Oh and Evan, please don't trot out the false, yet sole reasoned economic justification you put forward in this piece for rate cuts benefiting the wider UK economy, rather than narrow, selfish, vested interests registered in the Caymas/British Virgin Islands/..., that of, and I quote:
"...they can lower the pound and help exporters sell more. The Americans have pulled off this TRICK to some extent (although there is a long way to go). The British may follow."
I'm sorry, but here you're hoisted by your own employer, the Βι¶ΉΤΌΕΔ's, business reports today, exposing this "trick", not to mention true economic reality, rather than textbook pie in the sky, currency devaluation inevitably leading to trade rebalancing. Go to: - Βι¶ΉΤΌΕΔ Business newsitem, today 11th Jan 2008 at 15:15 GMT. And the headline is:
"US Trade Deficit Widens Sharply". And: "The US trade deficit expanded to its highest level in 14 months in November as imports, especially of oil, overshadowed a rise in exports."
But wait, the piece's writer is an incorrigible optimist like Evan. He/she adds - without any supporting statistical data to back it up mind - that:
"...but they(analysts) added that the trade deficit, the gap between imports and exports, SHOULD narrow in the longer term as the weaker dollar makes US exports more competitive on world markets."
Note that word "should". Beautiful. Like Evan's "probably". Well, that's it, the lofty heights of economic punditry.

I really admire your simple paragraphs, deconstructing economics for us all. For me it seems there are two big problems; one is that people expect to live on credit; and the other is that we live in a service economy, which does not add value to goods. What I would like to see is government control of credit advertising - just look at daytime TV today selling to sub-prime consumers; and stimulation of manufacturing industry. Isn't there some way to help manufacturing without driving consumers to greater excesses? Interest rates are a very blunt weapon.

The reduction in the value of the Dollar has in fact done nothing for the US balance of payments. See the story on this page.

Devaluations never have any long term benefits for exports or the balance of trade. They give short term solace and a chance for exporters to make extra profits, for sure. The Pound has been devalued again and again and what have we achieved? A record trade deficit and manufacturing jobs moving rapidly overseas.

Germany on the other hand has had a constantly appreciating currency and expanding trade surplus. Well, what a surprise.

It is time to kick this silly quick fix devaluation obsession and deal with the simple truth. We have been borrowing from foreigners to buy foreigners' goods, while convincing ourselves about how well off we are with ever rising house prices.

We really are the Golgafrinchans. Got any leaves?

The real problem is that unlike the US we are not rich in resources and have to import many of our raw materials - this is after all the reason we ended up building an empire. When the Β£ falls raw materials for manufacturers become more expensive, so while the finished product may become cheaper for foreigners, the profit margins of the manufacturer may well be squeezed.

We are constantly fighting inflation with more inflation. Stop looking at prices and start looking at the imbalance of money supply and economic growth.

We're already in a recession by these standards and have been since 2001.

Until we get back to a hard backed currency, the savers and pensioners will continue to be cheated.

Debt money can only be destroyed once it has been paid back. Once house prices start to truely deflate, inflation is going to be rampant beyond imagination.

There is much gloom on the fiscal horizons.
In 2001 there should have been a big recession. Instead central banks the World wide cut base rates to stimulate demand and therebye avoid nearly all of the pain.
In 2008, the chickens of that period and decision have clearly come home to roost.
It was clearly irresponsible to flood the World with cheap money just to get people spending.
As inflation across the World is now rising, the only tool to contain this, base rates, is the very thing that is crippling World economies.
Again the U.S is trying to pay to avoid recession. With inflation rising it is reducing rates simply because people can not afford them enmass, as a consequence a strong decline in consumer demand is the result along with a weakness in the financial instruments that have increased their risks beyond the manageable.
For the U.K I do not understand how with rising pressures on CPI and the BOE's remit to maintain this between 2 to 3% can have room for reduced rates with CPI at the top end, and likely to exceed this soon.
Expect a big recession in the U.S through 2008-2009 and the same in the U.K. Housing is unaffordable in the U.K this is not in dispute, there will need to be a correction and the affect this will have on the whole economy will be significant. Servicing debt during rising base rates is the problem the U.S and U.K face. The U.S is trying to ignore the problem. The U.K can not (by independance rules set out for the BOE), but, I suspect they will try to do the same.
Be warned, as Maggie said (and I quote her not because I thought she was absolutely correct on all things, just this), you can not buck the market.
For myself here in Australia since 2005, the economy here is over-heating. There is not enough expansion room. With other Worldly commitments ahead there is pressure on social costs causing inflation to rise too. However, due to the ramping up of industrialisation in India and China set to continue this should soften the blow for Aussies. They expect a decline in national business activity, but not a recession.

What lovely world no 7 lives in, a lot of energy use is not discretionary. Poeples houses need heating, jobs are not always available around the corner and public transport is a joke. Lower interest rates have produced a laise faire attitude to spending, people spent money that they did not have, so hiking interest rates up aggressively and then lowering them quickly does not help. It is also crazy to measure inflation in the current way that excludes items that are essential, just to make it sound low. We all know that the cost of living has risen more than 2.1%, but we are governed by an elite that pay for nothing themselves.(all those expenses that do not need receipts) Lets hope that the BoE is allowed to get on with the joob without too much meddling from Brown/Darling.

The trade-off with interest rates seems to me to be quite straightforward - lower them, and you stimulate economic activity, but you also stimulate inflation. It's like certain drugs, which make you go faster but also cause heart-strain. I think the inflationary risks will be such that the BofE will end up raising rates rather than lowering them. The widening gap between BofE base rate and commercial rates in the market is the straw in the wind. The BofE is like Canute commanding the tide to go back.

We've had a boom. Now we're going to have a bust.

This has happened every 10-20 years for as long as anyone can remember.

Is it in fact the case that neither the Bank of England nor everyone else has any material control over the economy at all?

This would be the Kevin Hawkins who issued a press release last autumn saying that food price inflation was a myth , thanks to the wonderfully competitive supermarkets.

The same Kevin Hawkins who tried to justify the price paid by supermarkets for milk , by quoting the farm price for June 2002 against December 2003.The 4p rise highlighted was 75% due to the seasonal fluctuation of producer milk prices.
i.e. May/June prices are always the lowest and Nov/Dec the highest every year.

All very well, but how does increased consumer spending feed through to increased consumer income?

A large and increasing percentage of consumer spend goes straight offshore - to cheap Asian
manufacturers, to offshored support services, to foreign companies, to the home countries of migrant
workers,.

The income that remains onshore and any corresponding foreign spend coming to this country is increasingly concentrated in the hands of a small subset of the consumer population. These people spend proportionately less of their income and are more likely to spend offshore.

This increasing difference between consumer income and consumer spend is made up by consumer borrowing.

To keep the process going this borrowing needs to be continuously rolled up.

This cannot go on forever.

To stop the system collapsing, debts need to be written off every so often. This used to be done by inflation - at the expense of the savers and the solvent. Currently the balance seems to be shifting
towards bankruptcies, IVAs and simple defaults - at the expense of creditors.

Retailers much prefer the inflation option - the immediate loss does not come out of their pockets!

I suggest the only way to defuse this very fraught situation is to (somehow) increase the actual income
available to all consumers in this country as well as making credit more difficult to obtain.

Somehow. . . . Tax cuts? A flatter distribution of income? Bringing supply of goods and services back
onshore? . . . I don't know how, but I wish someone who does would stand up.

Evan, brilliant article; at last someone is prepared to stand up and say that cuutting interest rates won't help consumers who are already punch drunk on too much borrowing.

The BRC has never done anything than ask for lower rates. What about higher rates for those who are careful enough to save for their retirement?

The further problem is that worldwide finacial authorities are dithering; Generals fighting the last war want lower rates; bureaucrats worrying about inflation want higher rates. This a lethal combination of muddling through which is causing the pound to collapse.

We are in for a painful period of readjustment as the debt financed Brown boom comes to a shuddering halt.

I know of a British "Manufacturer" who stamps "Made in UK" on their hinges. This manufacturing involves taking an imported pin, and putting it into the 2 imported halves of the hinge.

I know of another British "Manufacturer" who stamps "Made in UK" on their jewellery boxes. Again, this involves taking chinese made liners and putting them into chinese made boxes.

I wonder how representitive this is of British "Manufacturers", because as the "value added" process in these examples is so simple, a rate rise wouldn't make much difference to the factory gates price, indeed it may push prices up as the imported materials will cost more.

In any case, Sterling would have to take quite a plunge, not to mention a drop in out expected living standards, before we could compete with countries such as China on a level playing field.

What Britain needs is a wake-up call - people need to stop wasting their time discussing reality tv shows and start asking questions such as: "If our economy is really doing so well, then why is government and personal borrowing so high?"

People need to think about things like, if sales of HP Sauce have not declined since production was moved to Holland, what incentive is there for Heinz or any other manufacturer to keep manufacturing in Britain if they can do it cheaper elsewhere and perhaps sell off their UK land at a nice fat profit?

People need to realise that even if they don't personally work in manufacturing, and don't live in Birmingham, that these HP Sauce workers (for example) helped to support the same economy that supports our jobs.

We cannot depend on the government to waive a magic wand and sort out the mess, we need to stop being Dummed-down Britain if we're to stop the rot.

At 09:42 PM on 11 Jan 2008, Clive wrote(comment 19):

"Germany on the other hand has had a constantly appreciating currency and expanding trade surplus. Well, what a surprise."

Good point Clive, excellent total comment too, if I may say so. Didn't twig about the Golga' thing, so looked it up(Hitchhikers...). Spot on analogy, especially the leaves as legal tender thing. Sums Britain and the Britons up, if matters weren't so grave. Two quick connected points:

1. More than Germany with the appreciating Euro having an expanding trade surplus it is in fact the world's greatest exporter of manufactures, period. Did you know for instance that Audi sold more TTs(the just replaced '98-'06 model) in the UK than even in its home market Germany or the US? Boy do the Brits love those prestige German autos. And,

2. The media is full today of a puff story about the Briish being as rich as Croesus, thanks to the skyhigh price of their homes - Β£4trillion total wealth. Wow! So that's like a couple of thou' in real money - shekels/euros, or at a push, maybe swapped for a couple of gold($900/oz) sovereigns.

Massive, coming down the pike interest rate cuts equate to one thing: bye bye Pound and hyperinflation.

I wonder if there is an arguement for abandoning all attempts by the authorities to control bank lending rates.Lending is a highly competitive business, why should the Bank of England attempt to regulate the price of this particular service when almost all others are set by the market. If central banks need to control liquidity ( and there is a question in its self) surely there is a more refined tool than the blunt blade of base rates. Consumer credit could be regulated by requiring a higher percentage minimum repayment on credit cards without the damage that base rate adjustments do to long term business investment and currency levels.

Cutting interst rates will do nothing about the number one problem in both Britain and the United States, that of a really frighten level of household indebitness. One is is wooried stiff by monthly minimum debit card repayment, personal loans, morgage and other payments, the notional value of your house is not very important. Add to this the very real possibility that the job of one of the partners may come to an end during 2008 and at the very least bonuses and overtime dissappear. Cutting back becomes a matter of survival.

Irony is that the bank of england could have stopped this back in 2005 by raising rates. Again last year we saw the bank of england hold instead of rasing rates.

Now we need rates at 6-7% to make sterling strong and avoid the results of the credit crunch and bring down the rate of inflation.

Oil is increasing and wheat is increasing. It's time that the bank of england taught people that if they want their house to be an asset then they can expect it to behave like one. The real needs of life are food and fuel, housing can be rented cheap enough but food needs to be affordable as does heat.

evan, you seem to be ignorant of basic economics. allow me to explain.

inflation is a function of the amount of money in circulation. put simply, if there was twice as much money, money would be worth half as much. e-mail me if you don't understand this, i will try to find an even simpler explanation.

interest rates are the amount of money banks charge for lending money.

low interest rates encourage borrowing. in a sensibly run economy lowering interest rates would not affect the amount of money in circulation. however, the fractional reserve system used in the uk allows banks to loan money created out of thin air, thus increasing the amount of money in circulation.

thus, if the reserve requirement was increased, interest rates could be dropped with no impact on inflation.

if you disagree explain how interest rates affect inflation.

i'm guessing you know this really, but just don't want the public to find out. that way rich bankers can keep legally counterfeiting money.

I find it hard to believe that balance of payments is as unimportant as received wisdom claims. In the short term perhaps so but eventually there must be balance or a gift from one country to another.
Perhaps someone can explain how it has worked in the past.

Disappointing Evan, as usual the analysis overlooks the powerful tool of fiscal policy and its ability to provide a multiple of stimulii

Hi Evan,

The economy does not need rate cuts. What we need is rate hikes, and I have a tracker mortgage, so go figure that one out.

What has happened over the past 6 years is the biggest miss-allocation of capital in modern history. (I'm talking about the housing bubble, credit bubble and equity bubble) These bubbles were bought about by the reckless easy money policies of the Federal Reserve, the US Government and to a lesser extent, our own Bank of England. England has become a nation of spendaholics, our industry is shot and we increasingly rely on foreign governments to bail out our costly spending addiction.

If we are not encouraged to tighten out belts right now, and start saving then when the recession, whenit hits and believe me it is going to hit, will be more prolonged and more agonising.

Cutting rates and increasing money supply will not reinflate the economy. It will merely lead to another bubble in another area. (Commodities, perhaps?)

I therefore urge the Bank not to give in to the short sightedness of big business and raise rates to stave off the real inflation threat we face.

Evan, all of your points regarding interest rates are valid. However the world has changed so much, and therefore so have the effects of some of these (outdated) measures. Years ago (most) people did not buy a house as a commodity...it was bought as a home.

The world is in such an overheated postition largely due to the easy money given to property investors/developers, absurd tax laws relating to negative gearing and China. This is a worldwide problem.

Allowing greedy investors to buy more than 2-3 properties without some restriction has always been a recipe for disaster. It has hugely inflated property prices and fueled consumer spending. Yes, immigration has also contributed to this, however many immigrants are sending their earnings home to help their families, or so that they will have a strong base to start from when they eventually return home.

Then we come to China. The markets all around the world are awash with their cheap goods. Ironically, the cheapness of these goods has contributed to inflation. Is has helped promote our wasteful consumer society. People will buy 5 cheap Chinese items whereas previously more consideration would have been given before purchasing, as it was more expensive. Then 4 of the items will be discarded so that more cheap purchases can be made. It's been spend, spend, spend.

Interest rates cuts WILL aid local manufacturers and exporters - but not greatly. All countries will find their manufacturing and export sectors struggling until Chinese products are more expensive to buy.

The cost of importing oil and gas will increase if interest rates are cut due to a devaluation of the pound. I disagree strongly with people that state energy is an unavoidable cost. Certainly there are exceptions, but by and large most individual people could reduce their gas, electricity and petrol use by being more prudent with their use. Environmentally-wise people should be looking at this anyway. Businesses however do not have a huge choice and the costs will be passed on to the consumer. More inflation. With a third of the worlds population (India/China) now placing demands on these resources people had better get used to the idea of big energy bills.

Interest rate cuts (and devaluation of pound) will also have another ironic twist. Importing Chinese products will be more expensive. The retailers will pass the cost onto consumers. Inflation again.

As we see there will be no quick fix. Housing prices may slow or correct slightly but the property investors who are already in a good financial position will still push prices up. A housing correction just aids the growth of their portfolios. Continuing immigration will also prevent a housing slump. Business-wise, until the China situation becomes more balanced then the world will remain out of balance.

Hi Evan, I am a 59 year old man who has taken early retirement finaced by money deposited in the Building Society.
I am told that there are many more like me who help to keep the banks & building societies in funds.
Every time we have an interest rate drop my income also drops. This in turn stops me spending or saving any more because I can't afford to.
With the true cost of inflation being 5% & rising, how can anyone justify cutting rates!
If you go back a few months all you "EXPERTS" were saying rates would reach 6.5% in 2008 but the credit crunch has changed all that!
I don't know much about econmics but I do know that I don't believe any of you any more!
Rising house prices are no good to first time buyers & should have been kept in check.
We are in debt individually so why encourage further spending by people who haven't got the brains to show restraint.
We have painted ourselves into a corner which you economists are trying to talk us out of, but I for one have stopped listening beacause you economists don't make any sense!!!!

Hi Evan, We have only had a 0.25% cut in rates and The Pound is in free-fall.

Is there really any scope for meaningful cuts from here?
Has the inflation target gone out of the window?

No comment on the present sterling crisis? Why? Sterling has fallen 11.76% versus the euro over the past twelve months. Is this not a crisis?

Inflation needs to be takelled because inflationary pressures have been created as a result of setting rates too low and too long.
House prices have gone up too high. We need a period of high interest rates so that prices are brought back to the trend and so that younger people can afford their first home. Perhaps a basic human right.
With half of all UK workers on Β£19K or less a first time home should cost around Β£60K and not Β£160K. In London the average salary is around 30K and so we should see average first time homes at Β£90-100K and not Β£250K.
To prevent the inflationary pressures that were created between 2001 and 2008, but that we are yet to see, we need a period of higher interest rates.

In his main conclusion that reducing interest rates will not financially help the retail trade, Evan is spot on.

The only people significantly affected by falling rates are those taking out new loans or coming off a fixed rate. As the housing market declines there will be fewer of the former and the BoE have stated that there are actually very few of the latter in any one year.

Despite falling short and long term bank and "swap" rates, fixed rates are actually rising as banks increase their margins to raise cash to buffer themselves against the effect of the credit crunch.

However falling interest can have a positive psychological effect as people think they might benefit in the future and are therefore "happier".

The main reason for a reduction in consumer expenditure is people's expectation of their future income. If they think bad times are coming they will pay off debt (which passes for "saving" these days) rather than spending more. This is a psychological effect rather than a financial one, and can become a self-fulfilling prophecy - reduced expenditure leads to a recession leads to bad times.

The BoE have got the rate of inflation over the last few years wrong becuase they have not taken into account the inflation in asset prices, principally property. This had lead to an asset price bubble that when it cracks which it appears to have finally done wil cause a major recession as in the early 1990s.
However, UK citizens are also to blame for this by thinking that house prices will always continue to grow and interest rates stay low, making it a no brainer to taje out that low mortgage rate, People need to think more long term about their spending. Get Financial education in schools now!

Thanks, Evan.

One thing I still can't get my head around (maybe someone out there can help).
You mention that because our saving rates are so low, dropping interest rates wouldn't actually prompt us to spend more. The only way I can get my head around this by referring to the 'mood' ... imagine the consumer thinking: "well, rates have dropped, but I'm still not saving very much. Rather than spending this free cash I now have, I'd better pile it into my savings account (even though I'd be earning even less on it...)"
Does that sound right?

Its just another seventies revival ... stagflation. Difference is in the seventies attitudes to debt were a bit different. Factor in the derivative problems so far are probably just the tip of the iceberg and it all looks like it will get very messy indeed.

JP #45

No, it is simpler than that. I think you may be confused by terminology. By "saving rate" Evan means the amount we save each month, not the interest rate we get on it.

Also remember that paying off debt also counts as "saving", and taking on more debt reduces the saving rate.

Generally speaking if interest rates go up, that is an incentive to save more and spend less. Likewise if they go down we should be inclined to save less and spend more.

The anomoly in the British economy is that over the last 18 months we have all been behaving irrationally (or at least been a bit slow on the uptake).

We have continued to spend at the same rate even though interest rates were rising. This reduced the amount we could save because on the one hand our mortgage payments were rising and on the other hand we continued to buy the same amount of goods and services. This twin drain on our resources has reduced the amount of surplus cash available for saving.

Because we are saving so little already, it is very difficult to see how we could save any less (or spend any more), regardless of how far interest rates fall.

There are some tenantive signs that our behaviour may be changing. Retail sales appear to be weakening and house purchases and new mortgages are declining. This needs to carry on for a while before the BoE has any real scope to cut interest rates significantly.

As long as we all carry on spending merrily and putting ourselves deeper and deeper into debt then clearly higher interest rates are not high enough!

Someone wrote above that the cheap goods from China were contributing to inflation. If you are using the rise in prices definition of inflation, then these cheap goods are doing the exact opposite.

Japan have had extremely low rates for a long long time. The had a chance to export to a booming global market. But I'm told they still haven't fully recovered due to very poor fiscal policy.