Bank of England cuts interest rates by 1.5%

6.30pm WATCH: George Osborne's reaction to interest rate cut

2.15pm George Osborne has issued the following further remarks:

“This is a shot in the arm for the economy, but it shows how sick the patient is. As we have argued, reducing interest rates is the best way to fight the recession and so we welcome the Bank of England’s decision. But the size of the cut means that the Bank recognises the UK economy is in serious trouble.

“Now we need the cut to be passed on to homeowners and small businesses. I would hope that banks that see themselves in strong and stable positions can pass on the cut in full. The recapitalisation plan was not just to rescue the banks but to rescue the economy and the millions of families who depend on it.”

1.10pm Shadow Chancellor George Osborne reacted by saying that the cut was "an indication of how serious an economic situation we are in" and that it was confirmation that we are in a "deep an economic hole" and "ill-prepared for the events which are about to unfold".

Mr Osborne added, like Michael Fallon, that it was essential the cuts were passed on to customers.

1pm: Michael Fallon MP (via PoliticsHome): Mr Fallon said the interest rate cut of 1.5 % shows how bad the Bank of England thinks things are, and added that there’s no excuse for banks not to pass on the cut to customers.

“It’s the news behind it that’s grim. Clearly the Bank now knows how bad things are, and that we’re now entering a bad recession. It really is time now banks rewarded loyalty by cutting. There is no excuse now for banks not to pass on these cuts in full.”

Asked whether banks have a moral responsibility to pass on rate cuts to customers he said, “They certainly do. We’re in a battle now against recession, and everyone has to play their part. “If these two cuts in succession don’t work, it’s hard to see what will.”"

Comments

[ACT]

What meaningful party political reaction can there be? Either you believe that the independent central bank should independently set interest rates, or, as seemingly tonnes of 'Tories' do, you think George Osborne should. If we believe in the merits of an independent central bank - which we should - then there is no point in pretending that there is any great political point to be made apropos the Bank of England behaving exactly the way we should wish it to.

[meli]

As it says Reaction to follow... I guess I'll give my reaction in the meantime. Mostly because this is something I've been wanting to say for some time now. I guess I must be dumb basically. I fail to see how this benefits we the people. We have bailed out the banks with our tax money, not just me but my children will be paying for some time I suspect. How has that bailout actually helped me? This is the bit I am missing. I see no relief on my morgage interest rates and doubt I will see much from this lovely and large interest rate cut. Nor do I forsee a boost in the housing market as banks, which we bailed out, are not lending to us. So it is nice of us to bail out the big guys, meanwhile we (the little guys who funded the bailout of the rich guys) fall into debt with negative equity on our homes, which coupled with increased costs of our daily needs, food, fuel etc will at some point bring the little guys on the white horses who saved the day into ruin. Someone explain why this is a good thing please.

[Another Richard]

meli

I predict you'll see an effect of your savings rates though.

[meli]

ah yes thanks for pointing that fact out Another Richard. How could I forget? Any money I do have in savings, I can expect less return on. And my children's savings accounts? Less. Forgive me if I no longer have the energy to cheerlead this entire situation. I seem to have misplaced my pom poms.

[Sammy Finn]

At long last the Bank of England has done the right thing.

[resident leftie]

Either make the banks pass on the cuts, or shut up. This applies to all sides.

[Malcolm Dunn]

Footsie is still down by more than 3%.A measure of how bad the market believes the situation really is.
Osborne and Fallon are only stating the bleeding obvious.
Interest rate cuts have not worked in the USA to date,I wonder how much of a difference it'll make here.
Sterling will probably take a beating, it's the first time since it was created that our rates are below the Eurozone. That should be good for our exporters.

[Clive Elliot]

This will be highly inflationary.
The effects will dawn in a couple of years' time.

[Stuart M]

This has left me bitter and very, very angry.
It is without doubt the most immoral act engineered by this labour government - and let's not be fooled - the so called independance of the bank of england is clearly a myth - labour is behind this.
As a saver, with inflation at more than 5% it was difficult enough to get a fair rate for my money - but this makes it worse than impossible.
Every saver in the country has today seen the wholesale pillaging of their savings - their money that they have painstakingly earned and gone without for - no one elses - and for what? - to satisfy the sheer greed of the government to allow them to spend and borrow yet more at vastly reduced rates and to bail out borrowers who have overreached themselves - and in the bargain almost destroyed the financial system.

Yes, the country needs a fiscal stimulus - but the only sensible way of doing this is to massivly slash taxes and government spending.

[Richard Ireland]

So pleased that Messrs and Osborne and - of course - the invincible Vince support the 'substantial' reduction in interest rates. Perhaps they can tell me how pensioners on fixed incomes are supposed to react. With joy and happiness?

[Cleethorpes Rock]

Meltdown caused by too much credit and borrowing. Solution.....more cheap credit and more borrowing? Retarded.

George Osborne should shut up about this. If we believe in a central bank setting the rates, it should be none of his business. He'd be better advised to think of some spending cuts and tax reductions if he wants to win votes.

Then again, Osborne has never had a real job so doesn't care what ordinary people think.

[Iain]

So having been on a ten year binge of consumer consumption the solution to our economic ills are?

More of the same!

Anyone else find that extremely depressing?

It seems to me if we are going to find away out of the mess we are in we need a different vision of where we want to go that needs to be set out, then you will get the desperately needed optimism from people that our economy needs, but the only 'vision' from Westminster is the same old rollercoaster, and we know where that journey ends .

[RichardJ]

I seem to recall (from reading, not because I was there at the time) that the Fed tried to increase liquidity during the Great Depression but failed due to peoples' lack of faith in the banks.

I still hold to the quaint view that the market rather than a central institution should be setting interest rates. It may be that 3% is actually too low and will trigger another round of lending to projects that now look artificially profitable i.e. we'll have even more bad investments.

On a personal note, my savings account is very very unhappy.

[M Dowding]

I fully agree with the posts above, that this is not a good thing. Banks CANNOT pass this on. They have not, just like miracle worker and saviour of the world Brownstain, ANY MONEY.
This is purely politically driven. Politicians in their aloof, protected world are clueless. Our Conservative mantra should be to bite the bullet now. Higher rates, tight money supply control and a savage cut to public expenditure to get us out of the hell hole we are,as always from labour, deeply entrenched.
This will not and is not a recession. It is a depression. Brown's meme "we are better placed" is spot on. Better placed to be in a depression.
Our Leadership, such as it is, is being pathetic over all this. Interest rates are irrelevant. Shoulders to the wheel seems to be something no longer possible. Two jobs Shadow Cabinet is failing dismally. The time I can save giving up party work is more and more tempting. Can anyone give me a solid reason why we should bother?

[Lucy]

Heard Michael Fallon on R5 this morning insisting nonsensically that banks should pass on a rate cut to mortgage holders, as they had made so much money it was time to give some of it back.

Some guy from the Council of Mortgage Lenders explained very clearly that interbank lending was still very sluggish and the rates are very high and not responding to interest rates movements as they have in the past, but Fallon wouldn't have it and kept repeating the same weird argument that banks have some moral obligation to give money to their customers.

Felt like the twilight zone. It is alarming how ignorant MPs are about finance.

[Mark Fulford]

Prudence, my arse. The last 15 years have been characterised by reckless spending and borrowing – while Prudence smiled at his good work.

But I want to know… after we’ve bailed out the banks who lent more than people could repay … and then bailed out the people who borrowed more than they can afford … who’s going to bail me out once my savings have been whittled to nothing?

[Tony Makara]

A crass move from people who are caving in to political pressure. I dread to think of the implications for Sterling and imported inflation. At the very time the MPC should be looking to maintain price stability they have chosen to look the other way.

[NigelC]

isn't there an by-election today?

[Edward Huxley]

We OAPs don`t matter of course. Our income from savings made the hard way- by work- will no doubt go down.

Once again our rulers have made the wrong choice. Interest rate should have gone up, not down.

I suppose we should continue to be grateful to Gordon for the free TV licence and the winter fuel allowance. .

[m wood]

I agree with many of the comments above pointing out that the real problem in the financial system is lack of funds. This crisis has been caused by artificially increasing asset values (houses etc) over many years and suddenly people realising that much of the credit held was in fact 'make-believe money not matched by the real value of assets held as securities.
Banks now need real money in the form of savings and investments to be able to lend to businesses and house buyers. Cutting savings rates makes this far more difficult.

[RichardJ]

Nationwide have a 6 months savings bond of 6.25% I have just taken advantage of. Everyone get investing!

[pp]

If MIRAS was resurrected it would be a very useful tool in targeting tax reduction. And no need to rely on the 'good will' of the banks passing on rate cuts.

Demanding 'good will' from the market is completely wrong headed... The market has a duty to be efficient - tinker with it and is is sure to blow up in your face.

[Lindsay Jenkins]

Surely this addresses the wrong issue.

The problem I thought was that banks were reluctant to lend to each other or to anyone else because of the 'known unknowns' to coin a phrase.

So how does making money cheaper help - just as everyone else here is saying?

[Roy Lewis]

As John Redwood has said "it's a year too late.
Methinks "stable Door" and "bolted" come to mind?

[Northern Tory]

Well glad to see young George has something to say about the economy.

Not hugely insightful - but better than nowt. What is this "fixing the plumbing - all about"??!! Lets have a bit more analysis..

[Tony Makara]

The Daily Mail reports:

More than £62 billion was wiped off the value of the UK's biggest companies today in the wake of the Bank of England's shock 1.5% interest rate cut.

The drastic move sent the FTSE 100 Index into a tailspin as it hammered home the growing prospect of a prolonged recession.

[Iain]

"What is this "fixing the plumbing - all about"??!! Lets have a bit more analysis.."

Oh dear he's not doing his house analogies bit again is he? He had better be careful lest his analogies cancel each other out, for we've had the hole in the roof, the house on fire and now plumbing problems, so I suppose the leaking pipes put out the fire, and the hole on the roof allowed the water to escape.

And you are right some basic facts would be a dammed sight more telling than Osborne interminably wittering on about another housing problem.

[M Dowding]

IMF reportedly saying UK is to be the most deeply affected by the global downturn. Now I expect Snotty to say "I don't accept that".
He is so delusional and so destructive. Election next year? I don't think so. Nor in 2010. Liebore will say the crisis is so bad they need emergency powers to carry on!!!

[Cleethorpes Rock]

Brown should have fixed the plumbing when the sun was snowing.

[michael mcgough]

"Felt like the twilight zone. It is alarming how ignorant MPs are about finance."Lucy

perhaps one should add Chancellors and shadows too!

[Mark Williams]

Lucy:

I agree completely. The amount of money banks borrow from the Bank of England through the discount market is relatively small and the borrowing are short term Fixed rate borrowings as those linked to 3-month LIBOR are only going to be affected if those rates move down in sympathy with the BoE rate cut. More likely long term yields will rise in reaction to a likely depreciation of he curency. It is naive (or ignorant) to think that just because banks get a 1.5% cut in the rate of interest on a relatively small part of their borrowings that the banks can reduce their lending rates on all their assets.

It is wrongheaded to think that a 1.5% drop at the short yend of the yield curve will produce a uniform reduction across the whole yield curve. The more likely result is a steeper yield curve.

If the government wants banks to drop their total income from lending by £X billion the government will have to give the banks £X billion to do so, which is clearly not necessarily the same as passing on an interest rate cut.

[rugfish]

The Bank of England has cut interest rates by a massive 1.5% in a tactic to trigger spending, but as we've seen already, this tact did not work in America.

Cutting interest rates will have little or no impact on the economy.
Yes, if cuts are passed on to those on variable rates, or to new borrowers who are keen to risk taking a mortgage in volatile times with jobs evaporating rapidly, then it may help to reduce payments for some, but it won't help the millions of borrowers on fixed rates nor will it help the remortgage market or those planning to retire on an equity release schemes.

In addition to falling property values, lenders have reduced their loans to value ratio's and increased income ratio's for borrowers. Also, many non-conforming lenders have already sold up, moved on and are left the scene or are unable to sell their mortgage portfolio's and will consequently be unable to lend because they have no proper balance sheet.

Northern Rock's previous business model has now been taken out of the equation, and the washes of money it was once producing has been removed from our economy. In 2007 for instance, NR's remortgage business accounted for 20% of all remortgages in the with non-conforming lenders accounting for a further 20% and this lending is an irreplaceable drop of 40% not counting HBOS which accounted for most other lending which is now itself unable to lend or survive for the very same reasons.

The markets are not buying their portfolio's and this happened well before Lehman Bros dropped off the edge of its own financial earth.

A reduction in interest rates amounts to tinkering and blind panic.
It also underscores a fundamental lack of understanding by the government and Bank of England of how much the remortgage market once fueled our economy and attempts to revive it is akin to trying to re-create the already burst bubble.

Item:
How will a firm which needs to give a bank an asset guarantee manage to borrow against a home which has devalued when its current obligation exceeds the banks new risk ratios?

Item:
How will a home owner remortgage their devalued home when their lender has lowered the loan to value ratio in a falling market?

Item:
Where is the missing money in our economy going to come from when the remortgage market has dried up and is under the bureaucratic thumb of the FSA with its stringently enforced rules and regulations which themselves undermine the market?

Jobs can be saved by relaxing and remodelling mortgage regulation to remove red tape along with costs to business.

Additionally, lending ratio's and access to unsecured loans should be made available to businesses either through the banking institutions or through the DTI.

However this would simply perpetuate the reality that we are as an economy, spending money which has previously appeared from thin air which once propelled business and an economy which is without a real manufacturing base within a global economy which has itself dried up and hopefully awoken to the reality that the money driving it forward never really existed in the first place except mostly for the remortgage market and your flexible friend.

There's no turning back to this and it would make no sense to try for the world has finally caught on to the reality that nothing can be created from thin air and borrowing money on illiquid or devaluing assets is just not good practice and likely very potty.

[Janet]

It is time to show concern for those who save. How about pushing for an extraordinary one off £10000 Isa increase for those who want to put cash away.