Base, how low can you go?
As the New Year headlines are dominated once more with gloomy economic news, the Bank of England has reduced interest rates to their lowest level in the 315 year history of the bank.
The base rate was at five percent as recently as last October, but since then it'd dropped in monthly chunks of 0.5, 1.5 and one percent respectively to bring it to two percent - as low as it's ever been.
Today's move takes it to 1.5 percent - uncharted territory. In recent history, prior to Bankageddon, the lowest Interest rates had been since 1974 was 3.5 percent in July 2003.
The point of reducing the base rate is to cause money-lenders to reduce the interest rates they charge on existing and new loans, hence making it cheaper to borrow money and hence injecting liquidity into the financial system - i.e. get people spending.
However, we're in a bit of a Catch 22 situation as the reason there's little liquidity in the financial system is that the banks are all skint. This means that they're prioritising recouping some of their losses from the sub-prime mortgage debacle instead of competing with each other by offering more competitive loan and mortgage deals.
Politicians are trying to pressure banks into passing on the interest rate cuts but they can't force them. The one gesture the government has made to try to stimulate spending apart from the bank bailout - cutting VAT from 17.5 to 15 percent, for a bit - has been universally derided as ineffective and a waste of tax-payer's money.
So the question is: how much effect will this new low in the Bank of England base rate actually have?
