Policy makers these days at The Bank of England fall into two camps: those in favor of interest cuts and those who want to see rates unchanged.
In the most recent policy vote on July 7, the benchmark rate held fast at 4.75%, but it was a close call. The talking heads voted 5 to 4 to leave rates unchanged. This vote represents the clearest division in the Bank since 2003, when rates were last lowered.
The previous vote was black and white, when policy makers voted 7 to 2 to hold rates steady. Since that time however, the slowdown in British spending habits has drawn more members to the interest rate cut camp.
For the first time in four years, economic growth in twelve Euro nations moved ahead of the stalled UK economy. Before the first quarter slowdown, Britain saw an incredible 51 consecutive quarters of positive growth.
A cooling housing market and a nation of tapped out consumers with maxed out cards and mounting debt put the brakes on spending in the first quarter–which wasn’t a surprise to anyone watching the Brit economy.
While Governor Mervyn King swayed the policy makers to hold rates at 4.75% for the 11th month in a row, Chief Economist Charles Bean, Kate Barker, Stephen Nickell, and new member David Walton had hoped for a quarter-point reduction to try to renew economic growth.
All eyes are now on the next vote, set for early August, when expectations are high that the vote will swing the other way.
Royal Bank of Scotland Group Plc. Economist Ross Walker says, “August is pretty much a certainty [for an interest rate cut] and it’s an open question as to whether we get one more before the end of the year.”
I have to wonder, however, how much impact a lower interest rate can possibly have on a consumer with no more borrowing room left.
With personal bankruptcies in Britain already at an all-time high and the banks experiencing record levels of bad debts, I just don’t see a quarter-point cut encouraging disgruntled consumers to hand over any more of their hard-earned cash.
If I were behind on my debt payments with a wallet full of maxed out plastic, I wouldn’t be heading to the bank any time soon to borrow more.
I’ll be watching the UK closely after the next vote to see what unfolds in this stagnant economy–and I’ll certainly be sharing what I see with PROFIT CONFIDENTIAL readers. Stay tuned.