For the first time in history, the bank rate charged by the Bank of England stands at 0.5%, the sixth straight cut to the rate in an effort to revive the sagging economy. Another policy introduced by the bank is that of quantitative easing, which means the bank will place more money in the system to the tune of £75 billion.
This expansion of the monetary system is not expected to produce immediate results, however. According to Mervyn King, the governor of the Bank of England, the policy is a long term one that is expected to work “eventually.” He said that he has no idea how long the process will take, “but if countries work together, these measures will I believe eventually work.”
The bank Chancellor, Alistair Darling, claims that such measures by the bank are “absolutely essential” if the UK is to recover from the economic downturn that this recession has caused. He did say that UK consumers who had savings in accounts at the bank would suffer in terms of the amount of interest they will realize on the money, but that the bank has to look out for the interests of all customers and the economy of the country in general.
Through its plan for quantitative easing, the Bank of England will put more money into circulation. The initial amount is set at £75 billion, but this could double if necessary. Through this process, the commercial banks will have more money available for borrowers, making it easier for consumers to obtain approval for loans.
Although some interpret the system of quantitative easing as printing new money, this is not the plan of the Bank of England. No new banknotes will be printed. Instead, the Bank of England plans to purchase more assets, such as “government securities and corporate bonds.”
Financial analysts were surprised that the bank had agreed to put such a small amount of money into circulation, but at the same time they were pleased that it had taken this step. According to Philip Shaw, Investec’s chief economist, the plan of the bank should encourage lenders to extend loans to the private sector, such as households and businesses in order to stock “monetary growth and stimulate activity.”
In a letter dated February 17, 2009, Mr, King requested Mr. Darling’s permission to start the process of quantitative easing. In granting the permission, Mr. Darling said that such a measure was appropriate given the current financial circumstances.
The rate cuts by the Bank of England have also come under attack. On the day of the announcement, the FTSE 100 index fell by 3.1% and the pound fell to $1.4090 against the dollar. Businesses are not in agreement with the cut to interest rates saying that it will not lead to more loan approvals and will damage the savings of consumers unfairly.
The Council of Mortgage Lenders is one of the business associations not in agreement with this latest cut in the bank rate. Michael Coogan, the director general of the association, said that “This latest cut presents immense challenges for lenders whose margins are already squeezed as a result of previous reductions, leaving little scope to lower discretionary mortgage rates further.” This is because the banks depend on the savings of their consumers and unless they can offer competitive rates to these people, they will not have the ability to approve mortgages for new homeowners.
A chief economist with CBI, Ian McCafferty, doubts whether this latest cut will have any dramatic impact on the cost of borrowing or the ease of obtaining a loan. Even though the consumer price index has fallen in recent months, it is still above the target of 2% set by the government.
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