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Should the base rate be cut to 0.25%?

John Fitzsimons
by Lovemoney Staff John Fitzsimons on 30 July 2012  |  Comments 26 comments

The Bank of England is considering cutting bank base rate once again in order to boost the economy.

Should the base rate be cut to 0.25%?

City analysts have suggested the Bank of England may cut bank base rate even further to 0.25%.

The base rate decision will be published this Thursday, with suggestions that a cut to a new record low would help to stimulate the economy.

This follows the disastrous figures from the Office for National Statistics earlier this month which found that GDP had fallen by a whopping 0.7% between April and June, far higher than expected.

Base rate has sat mired at 0.5% for more than three years now, which has been great news for borrowers, particularly those on cheap trackers or standard variable rates. A further cut would be even better news for them, and would free up extra cash in their monthly budgets. The hope is that they would then spend that cash, giving the economy a boost.

However, such a cut would be a further kick in the teeth for savers who are already putting up with rubbish rates on their money. What’s more, there’s a risk that this extra cash would instead be sent on reducing debts rather than new spending.

What do you think? Should base rate be cut yet further? Or is there another answer to the nation’s economic malaise? Vote in our poll below and have your say in the Comments section.

More on the economy

Fears of higher interest rates after banks downgraded

Bank of England: two new stimulus schemes launched

Should we scrap the minimum wage?

UK falls back into recession

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Comments (26)

  • Arblaster
    Love rating 41
    Arblaster said

    This is lunacy. The base rate has already been at half a percent for three years. If that doesn't tell them that stimulating the economy doesn't work, nothing will. I say it doesn't work, but it is worse than that: it is ruining the economy. Pensioners, many of whom have never harmed a soul in their lives, have been living on their capital, which is fast running out. The Bank of England should stop buying its own bonds, and let the interest rates rise.

    Report on 30 July 2012  |  Love thisLove  3 loves
  • alexms
    Love rating 8
    alexms said

    1. Not sure that reducing debt is such a bad thing, especially in the current climate.

    2. The solution for suffering savers is to turn into investors - buy solar panels, pay the kids' mortgages, buy shares in cash-generating industries such as newspapers, rather than lining the banks' pockets. Boy-George should create an ISA-type tax-free vehicle that delivers UK blue-chip equity dividends tax-free up to a certain amount. Avoid euro-fairness regulations by saying shares must be denominated in GBP to avoid currency risk - ie, get the money sneakily invested in UK companies.

    Report on 31 July 2012  |  Love thisLove  1 love
  • PDB11
    Love rating 72
    PDB11 said

    I'm with Arblaster, sort of.

    I think stimulating the economy does work. But lowering interest rates doesn't stimulate the economy - as Arblaster says, it ruins the economy.

    This was one of Thatcher's great experiments. Cut the B of E loose from the Government (at least she didn't privatise it!) and give it economic targets. And the only weapon it had with which to shoot at those targets was the interest rate. The government is calling the golden shot, "Down a bit! Down a bit!" when in fact the aim is way off to the right.

    To most people today, this would seem totalitarian, but remember how we rebuilt British industry after the War? Export quotas. You got your allocation of resources if your order book had the required proportion of exports on it. In today's global market this would need some adjustment, but I think the "free" market, with the hands-off regulator twiddling a very indirect knob, has had its day. We need the government to get in there and regulate properly.

    This applies to Europe, too. The free market seems to be a dogma that informs European legislation. Fine in countries like Germany, which pays only lip service to EU law, or France, which thumbs its nose at it; but in countries where EU law means something, the insistence on the regulated free market as the only permissible structure is a disaster.

    No, I'm not against Europe; but I do think that EU law does some pretty silly things.

    Report on 31 July 2012  |  Love thisLove  0 loves
  • bengilda
    Love rating 77
    bengilda said

    For nigh three years now savers have seen their savings plundered by interest rates well below inflation which translates into savers slowly and continuously funding the government overspend.

    Should the bank rate and subsequent interest rates drop further then there will be absolutely no point in saving - IN THIS COUNTRY. The answer will be to spend it and invest in much more productive shares like utilities and large US based multi-nationals.

    Until our politicians have the guts to slash beaurocracy and just abandon so much regulation (whether the EU, LibDems or other leftish social groups like it or not) and cut all non essential spending completely.

    A good weed out of the executive level civil servants in central and local governmentand other public (NHS?) executives to remove the mundane and complacent time servers should next on the list.

    And redundancy pay rules should be altered to eliminate lump sum payouts, replacing them with a monthly stipend that terminates after employment is obtained.

    Report on 31 July 2012  |  Love thisLove  0 loves
  • smithdom
    Love rating 34
    smithdom said

    I think they should reduce the base rate to 0% now, just to demonstrate how futile lowering base rates is. The 0.5% base rate is meaningless, and 0% would be just as meaningless. What counts is what I can get as a saver (around 3.25% at the moment) and what you have to pay to borrow (not sure on that, I am not a borrower), and whether you can get anyone to lend you money (plenty of offers there, but no thanks).

    A gradual rise in interest rates might give more confidence to the prudent who save what they can rather than spend what they don't have, and they might then be more willing to spend some of their hard earned savings.

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  • BobbyW
    Love rating 10
    BobbyW said

    @ Arblaster - Can you please explain how putting the interest rate up is going help the situation? By forcing millions of homeowners to pay more for their mortgages in times where every penny is a prisoner why do you think this will help? The cost of Petrol is at an all time high, Food too, Insurances Costs set to soar at the end of the year.... I can just see how this pans out- "How can we help in times of a recession.... YES lets put everyones mortgage payments up.....Wait a minute - Why are people defaulting on these mortgage and why are there so many homeless people and why are repossesion levels so high? What do we do then, put the rates up again?

    The problem is the base rate being this low for so long HAS helped, up until recently where greeedy lenders have increased their SVR's even although base rate has remained the same- an increase in base rate will result in an equal increase in SVR's before the ink on the print confirming this is even dry.

    Lets print more money for Quantitive Easing, this seems like a good idea. Really?

    The problem is that the UK as a whole are far to dependant on the housing market and its volatility makes our countries financial stability precarious at best. I am all for people owning a 'home' for the right reasons but our obsession with owner occupier percentages will be our downfall...... Again.

    Report on 31 July 2012  |  Love thisLove  3 loves
  • ajrr1
    Love rating 11
    ajrr1 said

    Odd as it may sound, I prefer the idea of doing nothing.

    i.e. leave BoE rate of 0.5%, leave personal and business tax rates as they are (albeit try to stop some of the shameful tax avoidance).

    Uncertainty about future taxation and borrowing rates paralyzes individuals and businesses. Who wants to spend or invest in anything when they don't know how it's going to impact them in the future?

    As for overseas investment, any foreign investor would rightly be cautious of investing in UK PLC if they don't how future legislation will impact their returns.

    Let's stop this endless fiddling.

    Report on 31 July 2012  |  Love thisLove  2 loves
  • joembuck
    Love rating 2
    joembuck said

    @BobbyW

    "Wait a minute - Why are people defaulting on these mortgage and why are there so many homeless people and why are repossesion levels so high? "

    I don't think its anything to do with mortgage interest rates - 20 years ago I was paying well over 10% interest, which at the time was more than my take-home salary. (I started with some savings, which disappeared very quickly!) Another 1% on mortgage rates would be maybe £150/month on a 'typical' house. Yes for some people that will tip them over the edge, but if it does they are totally overextended anyway, and will be in big trouble as soon as the rates go up to anything like typical historic rates.

    Report on 31 July 2012  |  Love thisLove  0 loves
  • DaveDB
    Love rating 14
    DaveDB said

    The difference between success and failure for the UK economy and any business cannot possibly depend on a 0.25% lower interest rate - sounds like desperation... cutting taxes would do more good.

    Report on 31 July 2012  |  Love thisLove  0 loves
  • BobbyW
    Love rating 10
    BobbyW said

    @ Joembuck, I agree we are in a sticky predictament however I dont see why making it worse is the right thing to do? I understand that you paid 10% rate and that was normal at that time so everyone paid the same then.

    Things are different now and it needs to be addressed, I havent even mentioned the 'interest only' issue we are going to face in the next 10-15 years where people who have over comitted themselves on a mortgage they have only paid the interest on are asked to cough up for the actual amount they have borrowed.

    My point was that increasing the base rate will make the situation worse not better. What really frustrates me is the amount on negative publicity that surrounds everything house prices falling, inflation rising, - Instead of all the doom and gloom reporting on a problem (that we create largely ourselves via the media perma-pumping our brains with it) we should be concentrating on a solution. Lets stop talking about the problem and focus on a plan to improve the situation otherwise we are not going to get anywhere.

    Report on 31 July 2012  |  Love thisLove  0 loves
  • skylark
    Love rating 0
    skylark said

    WHY hasn't then reduction to 0.5% done anything for the average person and the economy?

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  • BobbyW
    Love rating 10
    BobbyW said

    @ Joembuck, also I would report the mortgage advisor that arranged the mortgage for you - You said that your mortgage was more than your take home pay? I take it that would have been your good ole bank manager then? Good to see that affordability calculation was as important 20 years ago as it is today..... :-)

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  • LandOfConfusion
    Love rating 64
    LandOfConfusion said

    Reducing IR's only works if it leads either shortly or directly to wage inflation. Instead it's just lead to basic inflation and made the economy weaker as a result.

    It also turns savers into investors and by doing so forces them into riskier asset classes. Now this is OK if it increases the short to long term rate at which money changes hands as it would also lead to increased economic activity and, by extension wage inflation. The problem here though is that after 3 years of far-too-low IR's this hasn't happened.

    So what if the BoE did the opposite and increased the base rate? Well doing so would lead to mass defaults and would probably bring the banking system down. But it would also purge the system of debt and, historically at least, lead to a fast recovery.

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  • Stickwithit
    Love rating 6
    Stickwithit said

    PDB11: Stimulating the economy does what it says on the can. Trouble is, the Government keeps opening the wrong cans.

    Now dropping the base rate of borrowing to one quarter or even zero is not going to make one ha’pence of difference to people who have saved, the damage has already and is still being done to their savings.

    When you come to think about it, I don’t suppose anyone in the UK could now be prosecuted for treachery against the State (us) or else we would have already seen it carried out against several names I can think of. The EU just would not permit that, we are so regulated by its law, and our politicians are probably very happy with that.

    Personally I recommend all savings are put into equities directly by the owners of those savings and the Banks can go hang and we’ll see what the Government can do about that.

    Report on 31 July 2012  |  Love thisLove  0 loves
  • Mike10613
    Love rating 599
    Mike10613 said

    It would be a waste of time. Interest rates need to be increased slowly. The cuts need to stop and government spending frozen. We need more efficiency. We need less chiefs and more indians in the civil service. We need the government contract with that French firm Atos Healthcare torn up and the same for G4S and their Olympic security contract. The other vultures with contracts to act as consultants to government departments need their contracts torn up too. We need the perks for the top knobs like judges and government commissioners cut to realistic levels. Let them provide for their own bloody pensions. We need a investigation into banking and finance and more regulation to prevent more scandals like interest rate fixing. We need to know who is taking top police officers out to dinner. We need to know where the billion pound budget of the BBC goes... We need the penalty for demanding money with menaces more robust to deter pay day loan parasites.

    Lets get back to honesty; stop the vultures and parasites ruining this country any more.

    Report on 31 July 2012  |  Love thisLove  1 love
  • nickpike
    Love rating 270
    nickpike said

    Half a percent has achieved nothing. What possible use would be another small drop? IRs should go back to 5.5%, then we can flush out all the bad debt. This and any more QE is stimulating nothing. The governnment spends too much and our wealth production has been decimated. We're doomed.

    Hope for the best. Prepare for the worst.

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  • Swansswimmer
    Love rating 5
    Swansswimmer said

    nickpike - I fail to see how raising interest rates to 5.5% stimulates the economy? It would stifle capital investment, encourage those companies with cash at the bank to hold on to it (because 5.5% is a very generous return in this economic climate) and borrowers (in the main younger people often with families) will have to pay more to servce their debts taking money out if the economy. There is no evidence that savers who receive higher returns on their savngs spend any extra income. Retired people tend to live to their often fixed budgets, and do not spend windfalls. In contrast we need money being spent in the shops, on capital goods, preferably British built, and where the £1 spent gets spent again and hopefully again. We need to close tax avoidance loop holes and increase the tax actually paid by the over wealthy, not necessarily be raising tax rates. Instead why not introduce a voucher credit system for all UK tax payers to the value of say £500 which has to be spent on goods or in shops within 12 months of issue? There must be a downside to this but at the very least it doesn't put the money in the hands of the ungrateful and greedy bankers (like QE) and will stimulate the economy.

    Report on 31 July 2012  |  Love thisLove  0 loves
  • AlanThomas
    Love rating 24
    AlanThomas said

    We are all paying for a group of peaple to sit around a table to discuss the reduction of the base rate from 0.5% to 0.25%...its not going to make any difference!

    Report on 31 July 2012  |  Love thisLove  0 loves
  • les1
    Love rating 13
    les1 said

    Hi swanssimmer, I think you are missing a point here. firstly the Economic problem here & now is in for a long time & this is the result of Governments & banks making money easy. Then greedy people overspending. You have had & do have the lowest mortgage interest in History & nothing is happening. Now we have coming up the largest retiree population again in History, most have saved, paid off their mortgages but are being hit by low interest affecting Annuities, pensions etc. These people have worked hard for their retirement but believe me will not spend a penny while they are penalised. The reason, they know the value of money better than present generations who are just beginning to realise that money does not grow on trees. Give savers a better return & they might just start spending which could assist greatly in pulling everyone out of this mess because believe me governments, Banks etc are between a "Rock & a Hard place created by themselves with no end in sight for a very long time.

    Report on 31 July 2012  |  Love thisLove  0 loves
  • yocoxy
    Love rating 132
    yocoxy said

    @Swansswimmer.

    I suspect that NickPike doesn't have economic growth as his goal, he wants to see house prices crash as he's been predicting for more than three years. I assume "flush out the bad debt" translates to 'evict anyone who doesn't have a large amount of equity or a mortgage that is a small income multiple' to achieve his desired outcome.

    To me a bad debt is one that isn't being paid, not one where the debtor is struggling but succeeding to pay. Creating a situation to ensure the failure of others for your own ends doesn't seem very gracious.

    NP posted on May 26th 2009 that we should all meet back here three years from that date so that he could gloat about his prediction of a 50% house price crash. I'm still waiting for the invitation which is already a couple of months overdue.

    I'll continue to "prepare for the worst" by having a spread of investments. (note that the FTSE 100 hasn't fared any better than house prices in recent years.. I won't pick specific dates and percentages because you can paint any picture you like from selective statistics in this kind of market)

    It must be fun living with some of the posters on these comments boards.. The end is nigh! Wait for disaster! I prefer to keep smiling, make the best of the situation, take opportunities as they arise and enjoy life.

    Report on 01 August 2012  |  Love thisLove  0 loves
  • Swansswimmer
    Love rating 5
    Swansswimmer said

    Hi Nic, not convinced that I've missed the point. I agree that the problem has been a long time in the making and agree it will most likely be a long time in the fixing. The issue is that our low inflation economy, which I would argue is the fundamental route of the Nation's problems, is now a perpetual shrinking economy. To remedy the now problem the economy needs to experience a growth in spending to enable businesses to grow, to take on more staff and for the unemployed to get back to work and contribute taxes to the Exchequer to halep pay off the Nations debts. We need part time employees to work longer hours and contribute taxes too. QE does not address these issues and the longer we leave it the worse the economy becomes.

    You write "Give savers a better return & they might just start spending which could assist greatly in pulling everyone out of this mess". Key here is 'might' and 'just' - and in my view this class of person is less likely to spend. They have what they feel they need/want/have saved for - and do not make other purchases, often concentrating on investments. I also ask how many of these people paid off their mortagages - is it not more accurate to say that they have benefitted from those years in the 70's, 80's and 90's of rampant inflation and salary rises to match which made mortagages shrink in real terms while their houses escalated in value. The outcome was a mortgage easily paid off and was not the result of a positive decision to save.

    The spending economy needs money to spend. Tax cuts and interest rate rises are not likely to stimulate spending and demand we need something more immediate and soon.

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  • petewilliams
    Love rating 17
    petewilliams said

    It is ridiculous to campaign that savers should be handed out free cash for doing nothing by increasing interest rates at the expense of the economy. All an increase in interest rates would mean is more mortgage defaults and small business closures.

    I agree with @alexms's comment that all this money sat languishing in bank accounts should be invested back into the economy if people want to see any return on it. After all, what do you think banks (try to) do with the money you put in savings accounts anyway?

    To expect a return on savings for free with no risk is as bad as expecting to borrow lots of cash for nothing and never pay it back.

    Invest it in the economy wisely, make a decent percentage return and do some wider good to the stagnant economy.

    Report on 01 August 2012  |  Love thisLove  0 loves
  • RMN05
    Love rating 11
    RMN05 said

    Why reduce interest rates and/or taxes ? People who currently have income only need to buy so much, spending "more" is only profligate. Consumerism isn't going to build or create an economy. Direct any spare resources into infrastructure so that "new" employment can be created, so that "new" earnings will be directed into the economy.

    Beats me what people on 6 figure earnings actually spend their money on. Our commitments don't exceed 15k, even running 3 cars. Treats & holidays & a bit of frivolous spending hardly stretch us beyond 19/20k, so all income beyond that aggregates for the "rainy days". Any more spending is pure profligacy, so I don't want extra titbits from reduced taxes. Direct it to where it's more purposeful.

    Report on 01 August 2012  |  Love thisLove  0 loves
  • LandOfConfusion
    Love rating 64
    LandOfConfusion said

    Swansswimmer said:

    "I fail to see how raising interest rates to 5.5% stimulates the economy?"

    Presumably by flushing out bad debts and making unwise investments far less favorable.

    But to do so now would necessarily mean that the economy would fail catastrophically with the only upside being that the consequent recovery would be quick.

    les1 said:

    "Now we have coming up the largest retiree population again in History [...] These people have worked hard for their retirement but believe me will not spend a penny while they are penalised."

    At present savers don't matter. They currently perform no useful function and some might even argue that they act as a drag on the economy by tying up liquid wealth.

    Also the soon-to-be retired generation shoulder a lot of the blame for our current predicament. They are the ones who used their homes as cash machines. They are the ones who left us with massive structural government debt and they are the ones who should ultimately pay.

    yocoxy said

    "To me a bad debt is one that isn't being paid, not one where the debtor is struggling but succeeding to pay."

    To me "bad debt", in the wider economic context, is any debt which requires social support to prevent it's default. So if a debt would become unserviceable because IR's have been returned to sensible levels then it would constitute a malinvestment and is bad.

    "It must be fun living with some of the posters on these comments boards"

    I've come to the conclusion that most people are dumb, greedy and elect the same. There also seems to be very little I can do about it except protect myself and exploit the above.

    So in that vein I now have an NS&I RPI-linked bond and have made several loans though both Funding Circle & Ratesetter.

    After all if you can't fight it then profit from it.

    Report on 01 August 2012  |  Love thisLove  0 loves
  • Arblaster
    Love rating 41
    Arblaster said

    @BobbyW

    You say:

    Can you please explain how putting the interest rate up is going help the situation?

    Yes, I can. Last I heard, British industry had shrunk to 12 percent of GDP. In order to get Britain exporting to survive, there has to be massive investment in British industry and infrastructure. The way to do this is to encourage saving, and that is one reason why you raise interest rates. Because of the small size of British industry, stimulating the economy only encourages people to buy imported goods. Even the stupid governments have contributed to this by forcing people out of using analog TVs onto digitals. No British company makes televisions. One needs to be curbing people's spending. If you give money to people, they spend it on imported goods. That's how we got into the situation we are in now.

    By forcing millions of homeowners to pay more for their mortgages in times where every penny is a prisoner why do you think this will help?

    Like Joembuck, we went through high taxation and sky high interest rates back in the late 70s/early 80s. We managed somehow.

    The cost of Petrol is at an all time high,

    That's your quantitative easing for you. You may know that oil is traded in US dollars (the so-called petrodollar). The USA has zero percent interest rates, and Sugar Pants Bernanke is inflating dollars and buying Treasuries like there is no tomorrow (And at this rate, there probably won't be.) And that is why the price of petrol is rising. Nothing to do with peak oil: there is enough oil to drown the world for at least another three centuries. The US is exporting its inflation throughout the world.

    Food too, Insurances Costs set to soar at the end of the year.... I can just see how this pans out- "How can we help in times of a recession.... YES lets put everyones mortgage payments up.....Wait a minute - Why are people defaulting on these mortgage and why are there so many homeless people and why are repossesion levels so high? What do we do then, put the rates up again?

    The BOE are printing money to avoid the recession. The recession is not the illness. The recession is the cure. The more the BOE prints money, the worse it will get in the end. Furthermore, because of the inflation, the stimulus packages will have to be bigger and bigger each time in order for them to work.

    The problem is the base rate being this low for so long HAS helped, up until recently where greeedy lenders...

    Oh, no, let's not have that old chestnut. Don't blame everyone else. Blame yourself. As Jeff Lynne's song says:

    Down, down in Old England Town

    All the money's gone astray

    Let's inflate this price and float away

    Just you and me and everyone

    Lets print more money for Quantitive Easing, this seems like a good idea. Really?

    The problem is that the UK as a whole are far to dependant on the housing market and its volatility makes our countries financial stability precarious at best. I am all for people owning a 'home' for the right reasons but our obsession with owner occupier percentages will be our downfall...... Again.

    Now you are contradicting yourself: you are beginning to agree with me.

    Report on 03 August 2012  |  Love thisLove  0 loves
  • BobbyW
    Love rating 10
    BobbyW said

    I have got the solution Arblaster.... We need a UK manufacturer to make digital TV's.... Only kidding.

    I would not have thought increasing the base rate is going to entice people to save money when they have less disposable income due to increase primarily in mortgage payments.

    Again just because you and Joe went through the high interest rates back in the 70's/80's and survived does not mean the generation of mortgage payers today could do the same. Im sure there are many things you could do when you were 18 that you cant do now!!! A lot of this generation of homeowners are maxed out to the hilt on their mortgage payments- many of which are interest only without any repayment vehicle, Unsecured debt levels are massively higher than the 70's/80's aswell all pointing to the inability to payout more on a mortgage.

    I dont really know anything about the US and oil prices or how finite the resources of said oil are so no comment, I am only concerned about what I have to pay to fill up my car at times where oil comes down in price and I dont see the price come down at the pumps I get a little annoyed.

    In regards to the £375 BILLION that the UK Gov have pumped into our country over the last 3 years in terms of QE - WTF - They would have been better buying out a TV manufacturer to solve our problem?

    This is not a UK exclusive problem funnily enough (PIGS- Portugal, Ireland, Greece and Spain) and if France falls its game over for the Eurozone, do you really think the EU Banks will allow as much 'QE' as the BOE.... NO CHANCE.

    We are stuck between a rock and a hard place and I still do not see how putting the UK at risk by increasing the base rate is going to do anything but capsize the lifeboat that the full of Europe is currently lost at sea on.

    Report on 07 August 2012  |  Love thisLove  0 loves

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