My hands are clammy, my heart is racing…yep, I’ve just read the Bank of England is cutting interest rates to 0.5 %.
Does anyone else feel the room closing around you when you read any news on the melting economy…we’re all doomed!
So what’s happened exactly?
First of all, the Bank of England cut interest rates by half a percentage point to a new historic low of 0.5% today.
Then…they decided to pump £75bn cash into the economy by buying up assets
So, tommorrow….the idea is that all this cash will be pumped into our pockets through lending and hand-outs.
The nuts and bolts of it is that the Bank of England is buying assets without issuing gilts thus increasing the quantity of hard cash in the economy
So what does this mean for the average jo and joe? Well, not much to be honest.
By flooding the banks with hard cash it should stimulate lending, however, considering their constant tightfistedness this is unlikely, but all that cash combined with historical low interest rates (since 1664) means that if the banks do decide to continue stashing all that money in their coffers there will be no benefits for them.
In so stimulating lending to me and you, and all those in between.
Funny thing though, with my basic understanding of economics I had always thought of the flooding of the economy with freshly printed bills was a very bad idea, I mean this is how inflation gets out of hand and economies are ruined as they are led down the road of hyperinflation eg Weimar, Argentina.
This quantitative easing that the Bank of England is doing is interesting but by no means is it a sure thing.
So, we know the how and the why, the when is a few months, immediate returns are unlikely.
Savers out there my advice is sit on your money for now, don’t hawk-eye your savings but rather spend wisely to help unclog the economy, although interest rates are so low as to give you negligible returns on your savings, say this: whoever got anything for free? It’s not like the initial amount you put in is devaluing so stop worrying.
Rates on credit cards/loans will continue to rise, although they are not based on the central bank’s interest rate but rather the borrower’s risk which is emphatically increasing.
Mortgage rates have also been cut.
A good crystal ball is the US and their economy, they went into recession six months ahead of us and have already cut the central bank’s interest rate to 0.25 % as well as started quantitative easing.
What do the experts think? The Guardian (interest rate cut: blahhh, quantitative easing: positive outlook), Financial Times (all about gilts and bonds), Simon Ward (blog for the high brow), and from my favourite money person Martin Lewis (interest rate cuts for dummies).
Oh yeah and for the love of god do not support English jobs for English workers aka protectionism aka very, very bad for the economy, at least I know that much.