BASE RATE – JUST A CON?
Today Base Rate is 5%. So what? LIBOR (the rate Banks are supposed to lend to each other) is 6.0% for one year and a one year Gilt earns 4.6% p.a. Drawings by the Banks under the emergency funding scheme are at 4.6% - so who gets or pays Base Rate?
Actually not many do – some Banks and Building Societies can get overnight money to/from the Bank of England. That’s about it.
Clearly the market does not believe that the Bank is in full control of interest rates else the Gilt, base and LIBOR rates would be very close.
Does the Bank of England know which way to go on rates or why? It’s supposed to use the wise men on the Monetary Policy Cttee to decide on the right rate to hold inflation at around 2%. (Inflation shortly expected to be around 5% so they’ve missed the target so far!) but at the last meeting they could not all agree – one wanted base up, one wanted it down. It’s messy.
Rates up; economy worsens, sterling up, imported prices down (oil, food…..), unemployment rises.
Rates down; inflation up, sterling weaker, oil and food prices up….
And then the Government needs to balance its own books. If the economy weakens tax revenues go down and the benefits bill goes up. And the Government already breaks the EU deficit rules. No wonder the Chancellor appears to have lost his head on his Shetland holiday! The problems are very big.
Which way next for interest rates? Most likely down a bit to try to sort out the economy, but inflation is pretty frightening and it’s all very unstable.
Don’t read too much of this. There is, probably, a future for the survivors.
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Tags: base rate, interest rates, Jon Moulton