Thursday, August 6, 2009

No change to UK Bank Base Rate of 0.5% but more cash required !

Bank to pump more cash in economy

The Bank of England's rate-setters have decided to pump another £50bn of new money into the economy in their programme of quantitative easing. They have spent £125bn so far in their attempts to stimulate the economy by putting more money into circulation. In order to extend the programme beyond £150bn they will have had to seek permission from the Treasury. The rate-setters also decided to keep interest rates unchanged at their historic low of 0.5% for a sixth month.

Posted by jack c @ 12:09 PM (2640 views)
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53 thoughts on “No change to UK Bank Base Rate of 0.5% but more cash required !

  • Sterling took a 1% dive on the news..

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  • Looks like we have an answer to our $64,000 question gentlemen, housing will be propped up at the expense of our currency. If this isn’t confirmation of that I don’t know what is. Time to fund the Forex account account again me thinks…

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  • “A foolly approof of this measures”

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  • As I observed yesterday, better to carry on then stop and start.

    Better still to launch a program of spending contraction in the public sector, so there is clear way forward..

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  • 4. uncle tom said… Better still to launch a program of spending contraction in the public sector, so there is clear way forward.

    It should be pretty obvious by now that this ISN’T going to happen.

    Political suicide for ANY party that tries it.

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  • @ Paul,
    Very funny caption, except that the joke is on the UK taxpayers and savers!

    The effect will be to add a few more temporary props to the housing market. It will also increase the headaches of whoever wins the next election. NuLabour are wrecking the country before they are turfed out.

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  • … as we thought in posts earlier this morning.

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  • A little thought experiment:

    Income tax was introduced by William Pitt the Younger “a temporary measure” in 1798.

    From income tax, we moved on to a perpetual national debt.

    Is it possible that quantative easing could become permanent because no political party will have the nerve to stop it?

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  • paranoia blue says:

    So things are even worse than they are letting on!!
    All we need now is for the Yanks to fire up another couple of Chinooks!
    Man, I’m so glad that I have a stash of the shinny stuff. What a total mess is developing! :{

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  • If the political parties won’t act on the runaway debt, as Devo says “suicide” then it will have to be forced on us by either failure to sell government bonds or by our having to go cap-in-hand to the IMF as happened with the last labour government. Mind you the IMF are swiftly running out of resources.

    Also if cuts are made to Public Services, Benefits, etc before the necessity is blatantly obvious to all, then strikes and civil disturbance will ensue. We are let down on two counts by our current crop of politicians: A) they lack the b&lls and B) they lack the respect required to carry through any meaningful policies. As mentioned elsewhere current government ministers are “fighting for a place on the lifeboat”.

    So can anyone describe the wall we will have to hit before we see some responsible decisions taken.

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  • QE is not a policy without long-term pain. At the end of the day, the MV.PT formula holds true and growth on one side MUST cause the other to grow. What’s confounding economics people is that it isn’t. The reason it isn’t is because the market isn’t functioning. The market isn’t functioning because buyers and sellers don’t trust each other. It’s a bit like selling your car and being offered a bank account with the agreed sum in there…. but having a nagging thought:… is this cash real, is it counterfeit, is it stolen, is it the sbject of legal action – and then deciding not to buy the car as you’re afraid you will lose out.

    The reason they don’t trust each other is because the banks themselves know that the losses or potential losses can’t all be declared or calculated with any certainty. Markets don’t like uncertainty… hence markets stall.

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  • Floggedhorse says:

    In a comment from the BOE they said
    “The recesssion appears to have been deeper than previously thought”.

    Oh dear! two years on the idiots are just waking up!

    Its not Governor Mervyn King – ist Mr Mannering

    “Don’t panic captain Mannering! dont panic!”

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  • Just a quick thought.

    I hear a lot of people saying CUT THE PUBLIC SECTOR! But that almost certainly won’t work – it’s not the answer.

    Cutting the public sector now will only render a large part of the population dependent on social security and basically removed from the economy. If anything (and this is an area where I have to say I agree with Gordon brown – as much as it pains me to say so) the public sector has to expand its spending to get people back into employment.

    Not a popular idea but if you stand back and forget politics it really is the only way.

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  • Cutting public spending is all very well, but everyone benefits from this spending, especially those on lower incomes. If you are rich cuts impact less. The Govt will indeed upset people if they start making sharp cuts, especially as they seem incapable of curbing the money-grabbing of the bankers, who share a large responsibility for getting us into this mess in the first place.

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  • vacuouspolitician says:

    Penfold and his mates strike again…

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  • B-b-b-b-but we haven’t got any money – unless we borrow more – or print more. It has to grind to a halt at some stage.

    Where are the incentives to create wealth and compete with other countries?

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  • matt_the_hat says:

    11. growler – “What’s confounding economics people is that it isn’t”

    If you look at your formula I think one of the symbol V stands for velocity of money – the problem is its nearly zero nobody wants to lend or spend (apart from the government) – so its not ‘confounding’ anyone. Eventually with hyperinflation the government WILL force people to spend or lose the money they have its just a matter of time before the flood gates open!!

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  • matt_the_hat says:

    Is it me or does £125bn + £50bn > £150bn see caption above. So did the BOE go back to the government to ask permission or not??

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  • 17. matt_the_hat

    Well spotted and a good question.

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  • need-a-crash says:

    @2. mrfibble: “Looks like we have an answer to our $64,000 question gentlemen, housing will be propped up at the expense of our currency. If this isn’t confirmation of that I don’t know what is.”

    Totally agree with you and as Mark Wadsworth said on here not so long ago, “Looks like we’ve been beaten by the govt”. With hindsight, was it really likely that any govt could allow house prices to fall by 20% in 18months and not do anything to try and prop them up, especially given how important we all know house prices are to the economy of this country?

    While I still believe house prices have further to fall, I fear the day that I will be able to buy anywhere decent to live is being moved further and further into the future and I am not getting any younger. I have been renting in flatshares and saving hard for many years now and while I have considerable savings, in many ways my domestic set up has not changed much since I was a student! I feel this has had a tremendous negative effect on my personal life vis a vis lack of confidence for a man of my age. Maybe the cost of waiting for the crash is just too great??

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  • Devo is correct Captain Darling authorised that wee bit extra cash – BBC have updated the storyline

    “Bank of England governor Mervyn King had to write a letter to the chancellor asking permission to extend the programme beyond £150bn.
    Alistair Darling wrote back, authorising the extension of the scheme, which is attempting to stimulate the economy by putting more money into circulation”

    As a consequence of the actions of this Gov I have my family primed for Armageddon

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  • The letters exchanged by King requesting an extension to the QE threshold and Darling’s letter giving him permission, both carry today’s date.

    Seems rather rushed for matters of such import.

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  • @19. need-a-crash

    I’d like to advise you to wait it out, as prices will fall, but depending on how big your cash pile is then you may end up with that getting decimated, leaving you no further ahead. The only people who are benefiting right now are the ones with zero money or less than zero money (debt), the rest of us are being screwed over royally.

    If any of this green shoot talk was remotely real then surely we wouldn’t be requiring more QE? It strikes me that today was the day we could have had a bash at looking like a credible nation, but instead the printing presses got fired up as the desperadoes attempt to keep the whole rotten game going. So the debt pile just gets bigger and bigger…

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  • @16 Matt the hat… Yes it’s true that people are reluctant to spend and that we need inflation, but you’re forgetting the big anchor of debt we have as a nation (personal & mortgage) : nasty combination – only way out will be a good old fashioned depression. It’s been designed to happen and it will, like it or not I’m afraid.

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  • The bottom line is that govt has a choice:

    1) Cut public spending in a steady orderly fashion.

    2) Be forced to cut public spending on the wake of hyper-inflation, in a disorderly and dramatic fashion.

    3) The private sector simply cannot afford to pay for the public sector in its current form. There is no third way.

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  • I think it will be option 2 via the IMF… Nice little present for the incoming administration after Gordon & Co. are voted out.

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  • devo said…Thursday, August 6, 2009 02:21PM “The letters exchanged by King requesting an extension to the QE threshold and Darling’s letter giving him permission, both carry today’s date.Seems rather rushed for matters of such import” – they couldnt be making policy up as they go along could they?

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  • bidin'matime says:

    need a crash / mr flibble – if your cash pile is for housing, then ignore general inflation – it will take years of above inflation earnings growth to catch up with property, so even if shop prices (CPI) rise, this will not necessarily reflect in property prices. In fact, as they will need to raise rates to choke off the CPI, this will further suppress house prices. So relax – CPI inflation does not erode your cash pile – unless you want to spend it on groceries and DVD players, of course.

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  • Anyone of the opinion that sitting on a cash pile (not earmarked at present for any specific purpose) could be a good thing in anticipation that interest rates rise significantly from BBR 0f 0.5%?

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  • Devo/Mattthehat.

    V is indeed the velocity of circulation. The point is that you’re right. It isn’t moving in the direction it ought to. Ordinarily it would be, and quite considerably. That’s the bit thats confounding people.

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  • The bottom line is that govt has a choice:

    1) Cut public spending in a steady orderly fashion.

    2) Be forced to cut public spending on the wake of hyper-inflation, in a disorderly and dramatic fashion.

    3) The private sector simply cannot afford to pay for the public sector in its current form. There is no third way.

    All three involve cutting public spending. I’ve explained why that won’t work – during a boom it would have worked but in a bust it will make the problem much much worse.

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  • jack c

    If interest rates go up it will be bacause inflation has started to pick up. If you believe we are going to see inflation it is a good time to take on debt and lock into a fixed rate. You certianly don’t want to be holding cash.

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  • luckyjim, you’ve just contradicted yourself.

    Surely if you think inflation won’t,/i> go up (and nobody here think the headline inflation rate will go up anytime soon), then taking out a new debt is a very, very bad idea.

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  • I’ll try that again.

    luckyjim, you’ve just contradicted yourself.

    Surely if you think inflation won’t go up (and nobody here think the headline inflation rate will go up anytime soon), then taking out a new debt is a very, very bad idea.

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  • uncle tom
    But the private sector does not pay for the public, the populace does. The public sector is not a holidaying bunch of people scrounging off the gainfully employed private sector. It is providing services that are considered essential for the well being of the nation, which the private for various reasons should not or cannot provide. We can argue about whether parts or the whole of it provides value for money, just as we can the private. And as for the argument that a poorly performing private sector company will always go out of business, I offer again the example of the banks.

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  • jack c (31)
    Well, since some deposit rates are above 3%, if you go by RPI inflation, then cash looks okay. You can fix higher, but if inflation does rise quickly that would not be good. Depends what you intend to do with the money. It looks like deposit rates are ticking upwards now because the building societies need cash. Any soothsayers got a view?

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  • bidin'matime says:

    jack c: It’s all very well you borrowing lots and locking into a fixed rate loan, but you don’t set the market price of houses – it’s all those people who are not locked in to low rates, or come to the end of their special deal, who set the price, when they have to sell en masse or are repossessed. Then the price of property falls, despite the rise in the headline rate of CPI/RPI. Then, if your cash pile is to buy property, it’s value rises, despite CPI/RPI. Simple really, innit..?

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  • bidin'matime says:

    Letthemfall: the deals are indeed interesting – 4% in yr 1, 4.5% yr 2 and 5% yr three from Coventry B.Soc, with 90 days loss of interest if you withdraw early. So they expect rates to rise. And if they rise much faster, you can withdraw and get the better rate elsewhere. Barnsley are offering 5% for 3yrs (5.4% for 5yrs), but with no withdrawal/early closure is permitted, so beware of this one.

    My money is on the currency markets trashing the pound and a good old fashioned sterling crisis. Why should Johnny Foreigner worry about the price of houses in the UK – he’ll only care about getting a decent return on his cash, or making sure that he gets a good discount (=> interest rate) for UK bonds, to allow for future devaluation of the currency. With a bit of luck, Norman Lamont will see a Labour chancellor stepping out into Downing St with that same worried look that the media loves to show us over and again…

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  • @31 & @39

    Cash has got to be the place to be at the moment. The stock market is simply experiencing a DCB, property – who knows? If property does show signs of maintaining an upwards momentum then having cash available might be a good thing.

    Just transferred a decent amount into Kent Reliance Building Society’s One Year Cash ISA at 3.20% NETT equivalent to 4% gross, which I don’t think is at all bad with base rate and inflation where they are at the moment, so if inflation does rise and rates with it, it won’t be tied up for long.

    As a Yorkisherman I never thought I would be recommending a southern building society!

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  • Apologies, I can’t even spell my native county correctly!

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  • @paul

    “nobody here thinks the headline inflation rate will go up anytime soon”

    I’m not so sure which is why I’ve switched some cash into assets I think will hold value (I think that was the basic idea behind Luckyjim’s comment)

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  • clockslinger says:

    Paul @ 13: whyever anyone should consider spending on the public sector (thereby creating and preserving jobs and benefitting ordinary folk) “unpopular” given the massive and potentially damaging handout to the finincial sector we have witnessed for fu#k all,is, to me, one of the abiding mysteries of all this. Maybe we have all got so used to being shafted and used that we miss it if it stops…or maybe the good people of the UK are even more dumb than I imagine. I, for one, would like a job, a welfare state and a decent syate pension for all the tax I have paid especially now I have seen what the oligarchy can afford to give to their friends in the banks.

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  • @22 paranoia blue. Yes, The Big Bopper – “I ain’t got no money, honey!” A classic, didn’t have to listen. What an unmatchable dirty laugh follows “Oh baby, you know what I like”. I remain convinced that Sid James modelled his on that one.

    Apologies to the younger posters – but I waited until the thread was fading.

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  • vacuouspolitician says:

    bidin’matime said…
    “With a bit of luck, Norman Lamont will see a Labour chancellor stepping out into Downing St with that same worried look that the media loves to show us over and again…”

    …and a weasly Cameron skulking around in the background…

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  • Paul

    IF you think inflation is going to go up you should convert your cash to assets. Better still borrow cash at a fixed rate and convert that to assets. There is no contradiction there.

    If inflation does go up the government will try to dampen it with higher interest rates.

    If you think interest rates will rise with no inflation then I suppose you would hold on to cash – but that wouldn’t happen. The government (or the BOE) isn’t going to put up interest rates without a reason.

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  • “But the private sector does not pay for the public, the populace does”

    And who, ultimately, pays the populace? The public sector is not a wealth generator, but a consumer; one that is consuming far too much.

    It has to be cut back; there is no clever way round this.

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  • bidin'matime says:

    luckyjim – if the inflation is CPI/RPI and you invest in tins of beans, then fine, but if your cash is for a house then read again my earlier comment (#30). Whether you get a cheap loan or not, the question is whether everyone else can do likewise – and they can’t – ultimately the market must pay the market price. As you say, interest rates will rise, so that must hit house prices.

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  • The answer to all our problems is inflation, in the 1970’s you could load up on debt and within a short time your 15% pay rises each year would quickly erode the debt. The inflation route only works if we all start getting 15% pay rises, some how I don’t see this happening with our new global economy nailing wages to the floor.

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  • @uncletom

    You’re still confused about the role of the public sector. You think they are leeches off the private sector, that without them the private sector would be unburdened – free if you will. Stop and think about it a little though … it is an idealistic fallacy.

    The private sector might survive without any public sector but it would so so miserably and grossly unfairly.

    A lot of what is mandated by the government enriches the private sector – in fact in macroeconomic terms most of it does because the salaries earned, the contracts awarded enrich private companies. I’m not making any excuses for public sector waste (or indeed private sector waste which the recent bonuses have shown us).

    The relationship between the private sector and public sector is symbiotic, not one simply of host and parasite in the way populist thinking likes to see it.

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  • Indeed paul.
    It is complete nonsense to claim the public sector generates no wealth, unless you think health, education, infrastructure, and so on and so on, have no value. Remove them and see what’s left!

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