How does cutting the Base Rate from the Bank of England encourage spending?

[midimaker]

Here is the situation for me between the years 2006-2009:

1) My credit rating has improved
2) In 2006, when shopping for a car loan, typical offer was 7.9%APR. In 2009, the typical offer is 12.9%. This goes for other quotes also
3) In 2006 I was getting a good �20 a month from my megre savings, in 2009 it will be �5 from around 4x the amount of capital

So please someone tell me:

How does cutting the Base Rate from the Bank of England encourage spending?

[Twenty20]

In theory it will because most people have mortgages and (mostly) the interest rate on these comes down when the Bank of England reduces its base rate, therefore most people will have extra money because of this.

Whether they spend that extra money is debatable though.

[factor-fiction]

Mortgage customers are benefitting significantly and companies who can get loans are benefiting also.

But I do agree with you that other loan rates haven't come down in line with base rate changes (although I'm not sure your figures are truly 'typical'- I don't thnk rates have generally gone up by 5%!).

This may be because banks got their fingers burned when they lent a lot at low rates a year or two ago, so are now trying to rebuild profit margins. Also banks used to subsidise low rates by selling expensive PPI on top, but have been forced to change their approach due to PPI misselling risks. Maybe if base rates hadn't come down you would be paying even more today for loans.

[factor-fiction]

Twenty twenty beat me to it.
Another factor is that in theory as bank rates fall savings rates fall so people decide to spend rather than save.