Bank base rate down to 0.5% by Bank of England
Posted by admin on 5 March, 2009 under Business news | 
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The Bank of England has today dropped the UK bank base rate to 0.5% which sets a new record low for the UK economy.
With the economy at a stand-still the Bank of England has taken further steps to stimulate the UK economy and in addition Mervyn King is about to do quantitative easing and will initially pump £75 billion into the economy and then up to a further £75 billion making a total of £150 billion!
There are two ways in which a government can get an economy going, and once interest rates have been dropped to such a point that any further cuts will have little effect then the other option is to go for quantative easing, which is simply where money is pumped into the economy.
The way this works in practice is for the central bank (and in this case the Bank of England) buys up financial assets, which includes government and corporate bonds from the large banking and insurance institutions. Once these institutions have this extra “Cash” in their accounts they can then boost the money supply, which in turn will increase the amount of money that is in circulation in order to revive the economy.
There are two ways in which quantative easing works with the first being that, with the banks having more “Cash” in their pockets they will be more willing to lend to businesses and individuals, thus putting more money into the economy. The second way that this works is that the effect of quantative easing is a downward pressure on lending rates making it cheaper for businesses and individuals to borrow.
The downside of quantative easing, as with reducing interest rates, is that it could spark off inflation as it is there to encourage spending and this is the risk that the UK government is taking by making this step to boost the UK economy. However, the opposite risk of not pumping cash into the economy in this way is for the UK economy to go into a deflationary period like Japan did some 10 years ago, which is extremely damaging for businesses, property and the economy as a whole.
Of course it could be that the banks still hold-back on lending even with the extra cash on their balance sheets, which of course would mean that there will be no effect on the economy, which is what happened in Japan – so we wait to see what happens.
almir said,
is that really that bad a .5 percent interest rate thats not bad at all especially since their are people losing their homes and jobs in order to survive these terrible time just because the banks failure to keep track of peoples track record
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louie jerome said,
The bank base rate might be low but I for one don’t see any benefit. If mortgage companies don’t pass the savings on, then they must be rubbing their hands with glee!
Todd said,
To much quantitative easing can only mean one thing….Hyperinflation and currency devaluation. A great hedge against this is gold and silver bullion. Let’s hope the bank of England gets this right and doesn’t push too hard down on the pedal of the printing press else Great Britain could be Great Weimar in a few years.
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Thanks
Jill xx
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