The Bank of England has just cut the base rate to 5%. But it's doing more harm than good...
At last, you may say!
Some relief for hard pressed consumers has finally appeared with today's 0.25% base rate cut from the Bank of England.
Except that this news is really anything but great. Indeed, for many home owners and potential buyers, it's almost irrelevant. And not only is inflation rising above target, price rises will get worse before they (perhaps) get better as the pound goes down the drain.
In my view, The Bank's cuts are doing more harm than good.
As anyone trying to arrange a mortgage will know, unless you can grab the latest lifeline from HSBC, most of the best deals are no longer on the table. Despite the Bank's rate reductions to date, the cost of home loan finance has been climbing.
And the signs from the money markets are that it's staying hyper-tough out there. My favourite boring subject, 3-month LIBOR -- the rate at which banks lend to each other -- has been steadfastly holding at nearly 6%.
LIBOR sets the pace for how much, and at what price, banks are prepared to lend. So Mr King and his henchmen on the Monetary Policy Committee (MPC) may set out the rules of the game, but if the commercial lenders don't want to play ball, borrowing costs stay high.
Nor will the latter be too swayed by political entreaties, either.
Lenders answer to their shareholders, not the electorate.
But by cutting rates, the Bank can at least dodge some flak by appearing to help out credit-crunched consumers, leaving the money markets as the true guardians of low inflation in the UK.
Yet inflation fears, already high, are still growing...
Price Rise Risk
There's a Bank statement accompanying the cut. Most of it talks about inflation, which perhaps suggests that the MPC has a guilty conscience about appearing to abandon its mandate to keep consumer price inflation (CPI) at 2%. No more, no less. (The MPC is supposed to use its base rate to keep inflation under control.)
Yet, CPI is already rising at 2.5%, fuelled by a combination of food and energy costs, with more upward price pressures in the pipeline. And the pound is plummeting.
So in order to try to square the circle, the MPC has come up with a classic. Apparently, if commodity prices stay where they are, "inflation should fall back".
Really, guys and gals? Nobody believes the official figures at the moment. How can CPI return to 2% if rates are cut and the British currency's value keeps on contracting?
Sterling is now below 200 Yen and €1.25. That's causing real pain to retailers and forcing prices of imported goods ever higher.
And it's not just essentials. If you're planning to holiday on the Continent this summer, prepare for a nasty shock. I'm already suffering. My local supermarket has just hiked the cost of a bottle of my favourite Calvados - French apple brandy, for those who don't partake - by 10%. In one hit.
More seriously, though, the Bank is gambling on the knock on effects of a serious slowdown in the City, as well as a worldwide recession, to meet its stated CPI goal.
Unlike the European Central Bank, which is fully aware of current price rise dangers and is holding the line on interest rates.
Yes I know that managing Stagflation (economic stagnation + inflation) is far from easy. But the Bank is now playing a very high risk game with the pound. And at the moment, it's losing.
