February 2009 – UK policy rates cut to historic low of 1%
The Bank of England’s Monetary Policy Committee (MPC) has lowered the Bank
Rate by 50bps to 1.00%.
UK Official Interest Rates
Percent
Percentage - set by the Bank of England
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
97
98
99
00
01
02
03
04
05
06
07
08
09
Source: Reuters EcoWin
The UK is in recession – indeed the cumulative output in the last two quarters has
been 2.1% – close to the 2.6% peak-to-trough decline recorded in the last recession
in the early 1990s. There is much further to go in the downswing.
The Economic Cycle - Growth in UK National Output
Percent
Annual percentage change in GDP at constant prices
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
Source: UK Statistics Commission
Despite the sharp fall in sterling and cheaper borrowing costs, corporate
Britain is contracting at a rapid rate. Exports might have been expected to
absorb some of the spare capacity – but depressed overseas demand is a big
obstacle to stage an export-led recovery.
Businesses reporting higher export orders
BCC quarterly trends survey, percentage balance of respondents
30
Net balance
20
30
20
Services
10
10
0
0
-10
-10
Manufacturing
-20
-20
-30
-30
00
01
Services
02
03
04
05
06
07
08
Manufacturing
Source: Reuters EcoWin
Consumers have become net borrowers over the last ten years and a
rebalancing of the economy is needed in favour of a higher level of
household saving. The savings ratio will probably have to climb to 5 per
cent of disposable income or higher in order to pay off existing debts and
rebuild household balance sheets. But saving is more difficult during a
recession and when the average returns on deposit accounts are so low. For
the time being, the Bank of England has signaled that irate savers are
playing second fiddle to the need to prevent a calamitous collapse in output
and jobs.
Economists at the Royal Bank of Scotland estimated that a sudden increase
in saving could bring about the worst ever recession in modern UK history.
“To take their savings ratio back up to target, households will have
to shift from net borrowing to the tune of £30bn in 2008 to net
saving of some £45bn – a swing of £75bn. If this adjustment were to
happen abruptly (this year only), it would shave roughly 5
percentage points off GDP growth.”
Consumer Borrowing and Interest Rates
20.0
9
17.5
8
15.0
7
12.5
6
10.0
5
Interest rates (RHS)
7.5
4
5.0
3
Percent
Percent
Annual percentage change in consumer borrowing in the UK and base interes
Consumer credit (left hand scale)
2.5
2
0.0
1
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Source: Reuters EcoWin
Trying to Stem the Credit Crunch
Percentage, since May 1997 base rates have been set by the Bank of England
7.0
7.0
6.5
6.0
6.5
London Interbank 3-Month Interest Rate
6.0
5.5
5.5
5.0
Percent
4.5
5.0
Bank of England Base Rate
4.5
4.0
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
Nov Dec Jan Feb Mar Apr May Jun Jul
07
08
Aug Sep
Oct Nov Dec Jan
09
Source: Bank of England
Number of loans approved for UK house purchase
Number of
Monthly figure, seasonally adjusted
140000
140000
130000
130000
120000
120000
110000
110000
100000
100000
90000
90000
80000
80000
70000
70000
60000
60000
50000
50000
40000
40000
30000
30000
20000
20000
01
02
03
04
05
06
07
08
Source: Council for Mortgage Lenders
Savings, Interest Rates and Unemployment
Two factors that influence the rate at which households save their disposable inc
15
15
Household savings ratio (% of disposable income
Base Interest Rate
Unemployment (Claimant count, seasonally adjus
14
Percent
13
Savings Ratio
14
13
12
12
11
11
10
10
9
9
8
8
7
7
6
6
5 Unemployment
Interest rates
4
5
3
3
2
2
1
1
4
0
0
-1
-1
-2
-2
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Source: UK Statistics Commission