Despite interest rates remaining at their historic low of 0.5%, the latest Monetary Policy Committee minutes from the Bank of England show that they could still go lower.
At their July meeting, where the Bank voted in favour of a further £50bn extension to their asset purchase programme, the attitude towards a further rate cut appears to have softened.
Whereas before the MPC believed that quantitative easing was more attractive than cutting interest rates, this time there was a suggestion that rate cutting would also be considered in the future.
This is likely to depend on the impact of the ‘funding for lending’ scheme, where High Street banks are able to borrow money from the Bank of England, in order to lend to individuals and businesses.
Funding for lending combined with further quantitative easing is intended to give the UK economy the boost it needs. If both initiatives fail, a rate cut to 0.25% or even to zero is likely to be on the agenda.
This all depends on economic growth and price inflation.
Whilst the Bank has a primary goal of maintaining price inflation at its target level over the medium term, their focus more recently has been on stimulating the UK economy, without delivering damaging levels of price inflation.
Now that inflation appears to be falling back towards the government target, additional stimulus in the form of rate cutting can be considered more seriously.
The challenge that the Bank has faced repeatedly since the onset of the global financial crisis has been how to get their policy measures to benefit the real economy.
Printing money to purchase bank owned assets and cutting the Bank Rate are both measures that should have delivered this in theory. In practice, the High Street banks seem to have been more concerned about balance sheet repairs than passing on cheaper lending rates to their customers.
Until the man in the street (and his business) can actually benefit from the measures taken by the Bank of England, these policy measures seem like a very expensive way of allowing the banks to return to extreme levels of profitability.
Only those of us with Bank Rate tracker mortgage deals, without collars in place, would benefit from a further rate cut. Whether mortgagees would then go out and spend the money saved on mortgage interest each month is another question without a certain answer.
Photo credit: Flickr/weeziggle
