It seems likely that the Bank of England Monetary Policy Committee will announce today a further cut in interest rates from the current official level of 2%. This would be a mistake.

 

Banks are unlikely to pass on to borrows the recent cuts in full so any further cuts are pointless and serve to undermine the authority of the Bank. By the time the banking system is sorted out and the low rates filter through to most borrowers, the current crisis will probably be largely over and the need for such low rates will be fading. Meanwhile, savers seem to bearing the brunt of the rate reductions.

 

Banks are simply taking the cuts as an opportunity to rebuild their profitability, in itself not a bad thing, rather than ease lending, the real problem. Somehow, the Bank of England needs to encourage banks to lend to each other (and thence to borrowers) at lower rates and in higher volumes. This will then allow rates cuts to be passed on to borrowers by increasing competition.