Bank slashes rates to 3%
By Norma Cohen FT

Published: November 6 2008 12:01 | Last updated: November 6 2008 12:30

The Bank of England slashed interest rates by 1.5 percentage points to 3 per cent in a wholly-unexpected move on Thursday as it cited “marked deterioration in the outlook for economic activity at home” in the teeth of “the most serious disruption for almost a century” in the global banking system.

The Bank noted that in the UK, output fell sharply in the third quarter and business surveys and reports by the Bank’s regional agents pointed to “continued severe retraction” in the months ahead. It cited faltering consumer spending as household budgets were squeezed and credit from external sources dried up.

Comments on various sites have mentioned that this might be too little too late.

The best opinion piece we found was this one on This is Money

This points which caught our eye was:

In normal times the interest rate set by the banks provides a base which is used to set all other rates, one of which is Libor, the rate at which banks lend to each other in the wholesale markets.

It is Libor which is also the benchmark used by banks in setting the rate at which they lend to companies, so Libor dictates the cost of money in the economy. Normally, when the base rate moved, Libor would follow. But in these troubled times Libor has gone its own way, reflecting, if you like, the belief that it does not matter what the Bank of England says, no one can make the banks trust each other and lend to each other unless they want to.

and this one

In previous downturns like that of the 1970s, they were bailed out by chronic inflation, which ran at 26% in 1975 and so cut everyone’s debt by a quarter. But inflation is seen these days as the enemy, not the solution, even though this financial discipline condemns us to a long haul.

and this

If he slashes rates by the unprecedented 1% some are demanding, it could easily backfire: in their present mood, people are likely to take it as confirmation that we are going down the plughole and get even more depressed.

Better, surely, to restrict any move to a less panicky 0.5% and leave something in the locker for an encore. Chances are, Mervyn’s audience will demand one.

So, what do you think?

Is the rate cut good for your business – or is it not what you need? Maybe you think there is a better way?
Type in your thoughts in the comment box below, and lets talk about it!