Friday, December 05, 2008

BoE rate cut: Economy welcomes it

With interest rates down to 2% and assuming banks pass some of the rate cut down especially to mortgage holders, this might well slow down the UK's slide into the economic abyss.

Its unlikely that banks will pass the whole cut because of concerns about
  • margins
  • the need to attract savers to offset the freeze in the wholesale market
but if they can pass even half of the two recent rate cuts (i.e. 125 basis points), that would still be of sopme benefit to the economy.

Those who are likely to benefit from the rate cut are
  1. Businesses with variable rate loans whose cost will be reduced therefore easing the pressure on profitability from lower sales
  2. Homeowners whose mortgages have interest rates that are variable, discount variable, and those that track BoE rate. Average house prices are just £200k, so somebody may save around £200 per month. Some of this will go into consumption.
  3. Business mortgage holders. Ditto
  4. Credit card holders. Uk gova is already mouthing off about many credit card providers who have been increasing APR despite interest rates going the other way. Any cut here will again feed through into consumption
  5. Weaker £ will help exporters.
Thank you BoE. It feels like a pay rise. For maybe 1 yr?

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