Just What I Thought

Back on July 21, I wrote about how it seemed pretty likely that the next Bank of England’s Monetary Policy Committee’s vote would mean an interest rate cut for the UK.

I mentioned how the slowdown in the British economy of late has been swaying the vote to the cut side, as consumers had all but stopped spending, housing sales had slipped, and manufacturing was down.

At the time, I quoted Ross Walker, Royal Bank of Scotland Group Plc, who agreed that an interest rate cut was on the horizon. “August,” he said, “is pretty much a certainty [for an interest rate cut].”

Well, he was right, and things are unfolding just as I thought.

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Last Thursday, August 4, 2005 saw the expected rate cut for the UK finally happen. The new benchmark rate is 4.5%, after a quarter-point cut.

The decision was cemented when recent financial results came in under expectations for the fourth quarter in a row. This is the worst economic performance England has seen in more than a decade.

What does the cut mean for the “Average Joe” in the UK? Well, the average £100,000 (US$177,885.83) variable mortgage will drop by about £15 (US$26.68) a month. Will a 25-buck cut really spur consumer spending? I highly doubt it.

For the few Brits who manage to stash away a few bucks in a savings account, the paltry interest they earn on their savings will be even less than it has been. Obviously, this won’t help boost spending either.

The Confederation of British Industry’s director general, Sir Digby Jones, said that “This cut will be a catalyst for growth and will provide an essential boost to consumer and business confidence.” Again, in my opinion, I don’t think this rate cut will do much in the way of boosting consumer confidence.

Many other economists are calling the cut “too little, too late.” Even Jones’ optimistic comments hinted that, on its own, the rate cut wouldn’t do much. “A further cut might be necessary later in the year,” he said. I’d say!

Now, let’s bring our focus to North America, where interest rates are now rising. As Michael said today, rising interest rates often result in a slower economy. In other words, after the Fed raises rates again and again over the next few months–and consumers can no longer afford to take on new debt or new mortgages–our economy will stall just like England’s has… and the vicious cycle of rate cuts and rate increases will start again.

Just watch. It will be just as I thought once again.