Wednesday, December 3, 2008

something for the BOE to think about……

BOJ finds that manipulating rates is packing little punch

Lower borrowing costs are usually believed to improve liquidity in the financial system and boost economic activity. However, given the global credit turmoil, banks and other financial institutions are increasingly cautious about extending fresh loans to companies for fear of defaults.

Posted by mark @ 01:13 PM (638 views)
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5 thoughts on “something for the BOE to think about……

  • Yes, banks hoard cash when there is fear. This plot shows reserves USA banks hold in excess of what they are required to maintain. It has exploded since October.

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  • As the article points out lending with base rates at 0.3% probably produces a loss after admin costs. so what incentive to lend is there?

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  • japanese uncle says:

    The issue is all the more serious for the fact BoE and the force behind it are not too stupid to be unaware of the experience in Japan. They are knowingly destroying the GBP. Hopeless spiral of price/wage reduction and nasty deflation will be just around the corner, though inflation may be observed on short term basis as import prices will have to increase for the moment.

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  • Monetary policy has been ineffective for many years.

    The idea behind monetary policy is that you can use interest rates to control the rate of growth in the money supply. The money supply grows when people borrow. But when base rates are in single figures and credit card rates are in the low-twenties, does the base rate really effect the amount borrowed ?

    It has almost become accepted now that changing interest rates has a fiscal effect which is far greater than the monetary effect ie the fact that disposable incomes are reduced when mortgage rates go up is far more significant than any effect on the overall amount of borrowing.

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  • I am probably wrong, but aren’t the excess reserves due to the equivalent of current accounts? Which can’t be counted as real reserve capital because it can be withdrawn at any time, as opposed to the longer term lock-in deposit accounts.
    ?

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