I have noticed of late the growing calls for further cuts in interest rates. Now, as I have a rather timely bought tracker mortgage this would be welcome on my own part; but really this is economic delusion of the first order.
If low interest rates are the answer...what was the question? Well, we have a balance sheet recession where there is far too much debt built up in the system. Lower rates would in theory help to give more time to those who need to repay their loans.
Even the Bank of England has not been convinced that this is the way. The reason for this is the Japan style liquidity trap it creates. Firstly, with no interest to be gained, nobody saves, this leads to less bank deposits - so banks hoard more money and make fewer loans. This is a liquidity trap. Secondly in the liquidity trap, because rates are so low, banks can't make a decent return anyway, so further adding to their desire not to lend. Finally, Quantitative Easing means they can make a nice small amount of money by just swapping monetary instruments with the Bank of England - so why bother with the real economy and real lending?
As if all this is not bad enough, if you are small lender like a Mutual, struggling to raise cash and having to offer high interest rates to attract depositors- whilst having no access to QE money - then you are finished as you can't raise money at 0%. We have already seen the decimation of the Mutual industry and this would probably spell the end for many Mutuals - how does that tally with the Vickers report aim of making banking more competitive?
And of course say you are a saver, this reduction in rates is very penal, rates being already far below the inflation rate which is likely to start going higher again son as food prices and Oil & Gas go up during the course of this year.
Interest rates are not the problem, the problem is too much debt to be serviced; this needs to be written off and the economy made more flexible. Maybe lower taxes would be a better way to provide the money to repay the debt or to reduce regulation so that new businesses may grow and prosper. The time for propping up the sick by juicing their rates is long-gone. It's time to face reality not try to resuscitate the debt patient.