Latest interest rate cut (5 Feb 2009)

[Bert]

The Bank of England has just cut the rate of interest down to 1%. Mortgage lenders are expected to follow suit. This is supposed to make credit easier to get, and so the "system" will get back to "normal" - whatever that is. This is where I have a problem understanding the logic of all this. People will take out mortgages and companies will borrow money based on these historically low interest rates. In a few years time, if things get back to normal, interest rates will rise to their usual level. People will not be able to keep up their mortgage payments, houses will be repossessed, the bottom will drop out of the housing market, etc - isn't this where we came in?

[Ethel]

And in the meantime people who rely on interest from their savings are struggling to make ends meet, so they use the capital, fall below the benefits threshold and start claiming benefits.

[sandmaster]

Bert - if Mr Brown reads this thread I can almost hear him say
'ah,,,,,,I thought there must be a catch'.
But is he so incompetent he will think you are talking rubbish.

[dr b]

Assuming one is able to take out a long term fixed rate mortgage for a home, I would borrow at today's low rate, locking in my payments. Thus if rates rise in 3 years I won't much care as my mortgage payment will not rise along with them. In the US, at any rate, a 30-year fixed rate mortgage is readily available (is it the same in the UK? Pardon my yank-centric ignorance).

Where US housing markets got into trouble was that folks were taking out variable rate mortgages when rates were already low, which is exactly the opposite of what they should have done (I mean, if an interest rate is 2%, in which direction is it most likely to go? So, borrow at a fixed rate!). Unethical mortgage brokers pushed unaffordable houses on the financially illiterate by focusing only on today's house payment and glossing over the likely rise in payments later on.

[craft1948]

I'm with you Ethel - the interest on my savings now is derisory!!

[Postdog]

I fail to understand the logic too, because it seems to me they are saying borrow more and spend more.

Now I am not in any difficulties, but I am not rolling in it either, and my concern is to keep debt to a minimum rather than incurring more. The last thing I am going to do is spend.

[maxi2]

Quit e right - the availability of cheap money was one of the factors that created the mess in the first place. We seem hell bent on short term fixes when we should be looking at the longer term. I would like to see the base rate at 5% minimum to revive the � and generate encouragement for savers.

[tigersam258]

not to defend banks as I hold them in the highest level of disregard possible but they are a business and therefore should try to maintain that their income outweighs their costs (unless they are called RBS). This means that if they are going to get less income from loans/mortgages etc, how could they pay out high interest rates on savings? Thats like Tescos buying in 1kg of potatoes for �1 and selling it for 50p. That will never happen. However, the Bank of England cuts the base rate so that loans are effectively cheaper, meaning that people should have more disposable income, encouraging sales on the high street. At the moment, most people are very sceptical of this and so are keeping their money their pocket causing the Bank of England to make further cuts. Unfortunately until prices get to an all time low people will not be encouraged to spend so its a vicious circle. The opposite happens though at times, people have too much money, inflation rises and the Bank of England puts up the base rate to curb spending otherwise we will be seeing a loaf of bread cost �10. Fiscal balancing is a tricky thing and is a risk just like anything else in this crazy world!

[pips1]

I agree with everyone on here, my money is now in a terrible state. I was retired from my full-time job on ill health grounds and some of the lump sum I got from my work pension I tied up till 2010 (when I officially retire) so that I wouldn't be tempted to spend it. The monthly pension I receive from work is not enough to live on so I use some of the rest of my savings, this used to earn interest so some of what I'd used was recovered. Now it earns nothing and the amount I tied up is not doing anything either. All my life I struggled and never ever had savings and now I have at long last this happens!! Can't win really.

[tigersam258]

unfortunately those like Pips who put their money into savings expecting a good return to give a good quality of life have been hardest by this 'recession'. My father in law just received his statement for his investments and he earned �3 on his investment in RBS shares over the last year. His investment was �50k. Not many worse interest rates than that. I told him that he should have invested the money in his son-in-law instead. He might then have got a better return. Well maybe a few curries and beers! :)

[Ethel]

I'm in a similar situation to pips, although I am fortunate to be still working from home, long after retirement age.

I would really be struggling otherwise

[sandmaster]

Has Brown realised his taxation takings are going to reduce because savers are not receiving income? This is in addition to shareholders not having (or having reduced) dividends. And PAYE receipts diminishing as more are unemployed.
God help the remaining taxpayers when UK Plc has to pay its bills

[jake-the-peg]

Reducing interest rates has lowered the value of the pound.

This makes British exports cheaper and makes British companies more competetive.

Personally I think that borrowed money needs to go less in tax cuts and more in direct Government spending.

This would increase peoples confidence in the economy and in their jobs, knowing there would be direct government spending filling order books.

And this is happening but Brown did let Cameron draw him into a taxation fight briefly.

People do get very worked up with ideas about government borrowing because they never look at the actual figures in context.

All the planned government borrowing will "saddle" us with a national debt roughly the same as Germany has today.

There has been criticism that Gordon Brown's measures haven't worked but had there been a response with the first actions people would be saying that he'd over-reacted and thrown away money in a panic.

Simple question - Can anyone explain Cameron's financial plan and how it will succeed ?

[sandmaster]

This makes British exports cheaper.......
except the downturn is global and our exporters are going out of business. No point being the cheapest if no one is buying.
The government's printing presses will be working non stop to cover this. Zimbabwe will be able to give us a few tips soon about how to get rid of the zeroes.

[Bert]

Wow! Eleven replies in a bit under an hour and a half. Is this any kind of a record? It is always the case that the rate for savers is less than the rate for borrowers, tigersam. I don't think Ethel and craft were saying that it could or should be any different, just that the income from savings is now next-to-nothing. It won't be long before we have to pay the banks to keep our money in them! [That's a sort of joke - if they did that, we'd all take our money out of savings accounts - but I wouldn't be surprised if fees were introduced for the running of current accounts.] Tigersam's father-in-law has done even worse than the �3 dividend. What is the value today of �50k's worth of shares in RBS a year ago? For dr b, we (in UK) do not have really long-term mortgages (I don't think so, anyway). I think the longest is a 5 year fixed term. So we'll be waiting for a collapse in the housing market in about 5 years' time. I'd like to help out by buying more, but I really have just about everything I need right now, so I'll only be buying stuff when my stuff breaks down.

[Bert]

It was eleven when I started to type!

[jake-the-peg]

You're behind the curve sandmaster.

It's not Zimbabwe inflation that's a problem right now but deflation.

With prices falling people don't buy because they're holdinf off for a cheaper price.

That's why the BoE can drop interest rates with such abandon right now.

You won't see them come up again until inflation starts to be a problem.

Ironically the BoE may be creating their own deflation issue as people wait for cheaper interest rates arount the corner.

Yes it's a global downturn but that doesn't mean nobody is buying it means people are buying less and are being much more carefull than they used to be which is why we now need to be much more competetive - hence the exchange rate issue.

It's sad for people who've lost money on the stock exchange but we've seen bubbles burst before like the dot.com boom of the late 90's and there's an inherant risk in direct investment in the stock market.

We've all suffered - God alone knows what'll be the state of our pensions.

Few of us will have the luxury of a final salary pension like some on this thread

But the important point is what to do - If you have any solid better ideas than what Gordon and Darling are doing right now I suggest you send them to David Cameron - because he sure as heck doesn't!