Thursday, November 06, 2008

3% Isn't Enough For Deep Recession

Slashing interest rates to 3% is a desperate measure for desperate times. But it won't go far enough to stave off a deepening recession. The Bank of England has seen sense but it could be too little too late. 

Both the government and the BBC made a big mistake by flagging up the economic crisis as a cosy little global "downturn"

That gave people a false sense of security and sent a confusing message when everyone, except the Bank of England, could see the economy was falling around their ears. 

But spinning that soft line, helped to deflect criticism away from Brown's 'boom and bust' and the guy who caused the economic mess in the first place. 

Now the stark truth has dawned and at last the Bank of England has seen some sense. It is not inflation that's the economic bogy man for the moment - it's that recession where everything grinds to a halt. 

The message sent out today by the Bank of England was loud and clear but in the past it's been confusing. At least now there's a clear signal to cut the rate to its lowest since the 1950s

But even a one and a half a percent cut won't do the trick. The downturn/recession is starting to bite hard. A much deeper rate cut may be needed and, if coupled with properly funded tax cuts, that may give people and the country the break they need.

Reluctant banks will have to be forced to pass on the rate to existing home owners, credit card and loan customers. Those looking for a mortgage or credit still have to find someone willing to lend the money and take on the risk. 

The key to economic survival is UK manufacturing. But that has been decimated by the government over the past decade as it saw the future in a now discredited financial services industry based on the City. 

Cutting the interest rate will give a much needed boost to manufacturing and small businesses. But only if rates come down and GDP increases in tandem, will the economy start to speed up. This rate cut will take an age to work through, while GDP just gets worse.

With any cut in interest rate there's a big downside. In the past, it's meant easy money and a borrowing boom, but now people are keeping their belts tightened. Any sign of rising inflation has to be tackled immediately. Savers will be hit. A lower rate means it's more expensive to buy goods and services from abroad. 

The whole of Brown and New Labour's economic model has been based on buying in cheap goods and services from such places as China and the Far East, helping create the mythical boom years and the feel-good factor. 

Just how far interest rates will have to drop is a sure sign of just how deep and long lasting the recession is going to be. 

If banks can be given a huge bail-out why not use some of that borrowed cash for tax cuts and breaks to help the pocket. Just how any tax cut is funded is the billion dollar question.

It will take more than this one and a half percent cut to get things really moving again.

Some economists believe it will have to go much, much further to kick start the domestic economy. The days of zero interest rates may not be too far ahead.

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