Final UK Interest Rate Cut?

Another week when the unthinkable has become reality – with probably the final cut in interest rates that we are likely to see this cycle announced last week, the base rate in the UK now stands at 0.5%.

Tens of thousands of borrowers will be paying nothing for their mortgages once the cut takes effect. Many homeowners on tracker mortgages have seen their mortgage rate drop by 4.5% in the past six months, reducing monthly interest payments by around 90%.

However, what is good news for one takes on nightmare proportions for another – savers will see interest rates on deposits falling once more and again the unthinkable has occurred, many savers will get no income from their savings – so much for prudence.

And what happens if you put your money into equities, even those which hold their dividends?

The capital gets slammed as other investors fret about its sustainability.

It seems the only certainty remains that we are still in very uncertain times.

Quantitative easing is to be the panacea for all ills which we are now to believe will revive the flagging economy. The Bank of England is to spend an initial £75 billion from central bank reserves to buy gilts and corporate bonds, with a further £75 billion also earmarked.

In theory, this should provide more money for the banks to lend, and increase the amount of credit in the economy, hence providing the consumer with cash to spend and companies with funds to support their activities. How much is enough, nobody knows—we are in uncharted territory.

By definition there is no limit to creating money, so we can create as much as we want to lift us out of this recession. The probability that we can achieve this without creating an inflation problem is low—but that is not something that we have to worry about right now.

Only time will tell whether the process has been effective. One can only hope it will have more success than the £12 billion VAT cut.

Its impact will be monitored, with a further £75 billion boost available in due course.

Unfortunately, the credit insurance markets have taken fresh fright, resulting in the cost of insuring against defaults rising, so credit may be more plentiful, but not necessarily cheaper.

In the meantime, Waitrose has announced the introduction of a value range and statistics from Asda show that since the start of the year the Great British Public are returning to nostalgia brands such as Bisto gravy and Bird’s custard in their droves in a bid to implement war-time strategies to field the challenges of the burgeoning recession. Fish fingers are replacing the fusion foods of the boom years and Marks and Spencer has reintroduced the jam sandwich. Children are rediscovering the simple pleasures of Lego whilst mothers are seeking employment to supplement household incomes. Lego has announced a 51% increase in UK sales in 2008.

But the world is not grinding to a halt.

The Chinese are at pains to tell us that their target for growth this year of a very respectable 8% will be met and that Chinese output is again expanding after months of contraction, cycles are playing themselves out and whilst we may not necessarily have passed the low point, we continue to believe we are nearer to the end of this turmoil than the beginning as every week passes.