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Peter Edwards: The view from here – we're in for rough ride on economy
IT was a history-making cut that confirmed the Bank of England is taking real action to combat the effects of the recession.
Why, then, does it feel so bad?
Maybe it's because it doesn't seem to make a difference anymore. We've all become used to interest rates dropping dramatically. After all, the last few months have seen more cuts than a cheap slasher movie, so a mere half point drop means we'll just shrug our shoulders and carry on grinding our way through the recession.
It has not always been like this – just last year a reduction to this level would have seemed astounding. But Britons have gone from being economic ingnues to weary veterans of the recession, even those of us experiencing the first major slump since we began work.
Now we all feel like experts and the statistics which used to be the currency of academics and policy wonks only – unemployment, inflation and economic confidence – have become the talking points of our daily lives.
So, given the new level of scrutiny which the Monetary Policy Committee faces, how did it fare yesterday? Pretty middling actually.
In cutting rates to 1.5 per cent, the lowest level since the Bank opened in 1694, it took the only course of action that was open.
Rarely can such a historic boost to the economy have felt so bad. Why? Because all the evidence suggests that this remarkable moment in monetary policy – a low never seen even in the Depression of the 1930s – will have little effect on the weight of the slump.
The onset of recession during the credit crunch – two separate phenomena, one the inevitable sequel to a boom, the other the extraordinary response to years of reckless lending in the US and Britain – has created a perfect storm that puts us all in peril.
It is unprecedented in its force and has corralled economists, politicians and central bankers into adopting textbook-splitting measures like last autumn's recapitalisation.
The slump in consumer spending, which is still in its early days, has triggered "the worst Christmas ever", claimed the scalp of Woolworths, pulled down the share price of high-street bellwether Marks & Spencer by nearly 60 per cent and forced it into axing up to 1,200 jobs, as well spelling the end of a host of smaller chains.
We've also had an utterly predictable collapse in house prices that only presages an even worse fall in 2009; a far less predictable slump in the value of sterling that has taken it humiliatingly close to parity with the euro, and an inflation rate dropping so quickly that it could soon be converted into deflation – falling prices.
That's why the picture is bleak and that's why consumer confidence has long since withdrawn its money from the bank, packed its bags and got on a boat to Brazil.
The bad dreams that flitted across our minds when the credit crunch began in the summer of 2007 have turned into an economic reality from which there is no way out.
Nightmare visions of three million unemployed over the next two years and of 1970s-style queues snaking round the corner of job centres will soon be made horribly manifest.
And the sad truth is that interest rate cuts will have little effect on lifting us out of this quagmire.
That the base rate has gone from a lofty 5.75 per cent to 1.5 per cent in 18 months, and still failed to get people to part with their pounds in Britain's high streets, reflects how quickly things have worsened.
Deploying the "nuclear option" of a further cut to zero could, in fact, have the opposite effect of that intended, by sending such a signal of incipient economic meltdown that it encourages families to spend even less on food, clothes and leisure.
It would also continue the policy of hammering savers and pushing down spending even more. Successive heavy cuts have hit those who depend on a high return from savings for the majority of their income, particularly pensioners, which is hardly going to encourage Gordon Brown's plan for consumers to spend their way to national recovery.
Critics have said that high street banks and building societies should pass on the interest rate cuts to their mortgage customers and, while this is undoubtedly true, it is only part of the problem. Of course, the banks which were bailed out by people like you and me should cut rates – that was the chief reason for the Bank of England making such dramatic moves – but it is still costing them a lot of money to borrow from each other.
You may have heard a bit about the wholesale money market in recent months. Well, this is where such lending happens. It has its own interest rate, called Libor, which dictates how much it costs for one bank to borrow from another overnight. This apparently arcane figure, which has been dubbed "the world's most important number", remained stubbornly high for
most of 2008 regardless of the pronouncements of Mervyn King in Threadneedle Street.
That made it harder for banks to get hold of the money which keeps them going and has already seen off one institution in the shape of Northern Rock.
Libor's three-month rate fell over the last quarter but still remains well above the Bank's base rate, so lenders have to pay more for their wholesale funding while making comparatively little from people paying off mortgages. Until Libor drops further and until the Government takes action to increase people's spending power – something more helpful than the 12.5bn VAT cut which ultimately meant spending a lot to gain nothing – then we can kiss goodbye to any hope of a recovery.
It's time to batten down the hatches; the good ship Britain is listing badly, Captain Brown and First Mate Darling don't know which way to steer and the storm shows no sign of breaking.
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Saturday 26 May 2012
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