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Interest rates slashed – your savings are now as worthless as your house

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Should we be surprised that the Bank of England took desperate action today, cutting interest rates by an astounding 1.5 percent down to 3 percent, the lowest level in over half a century? OK, so it’s a massive cut and far more than the 1% which even the most dovish of market watchers were calling for, but ultimately this trainwreck of an economy is now in completely uncharted waters so why not go completely over the top? What else is left to lose?

Despite strong evidence to the contrary, almost everybody seems to believe that massive interest rate cuts are a magic bullet that will re-inflate the property bubble, loosen up credit markets, get the public borrowing and spending again, and kick the stock market back into an upward trajectory. The US Federal Reserve has been ruthlessly hacking down the interest rate for the past year (it currently stands at 1.5 percent) with practically zero to show for it, the American housing market is still completely trashed and the stock markets just keep tumbling.

Other people have already made the comparison, but it bears repeating – Japan went through exactly what we’re going through at the end of the eighties, and has still not truly recovered despite enjoying unbelievably low interest rates (mostly below 1 percent, often as low as 0 percent) since the early nineties.

Mervyn King and the rest of the Monetary Policy Committee are perfectly aware of all this, but since the pressure on them to cut rates is enormous, and since little else seems to be working, why not bow to popular demand? At least then, when things continue to go tits-up in spectacular style, they can all sit back and say “Hey, don’t blame us, we did what you wanted…” 

Still, let’s all just be happy that some people might benefit from lower mortgage payments (assuming the banks pass on the rate cuts) and not focus too much on the fact that any savings you may have are now going to be completely demolished by inflation. Don’t worry though, if you want your savings to work a little harder you could always invest in the stock market… oh, wait…

 

  1. Funny how we all focus on mortgage repayments when rates are cut, not thinking about the cut in savings rates. I guess that’s because no one has any savings, they’re all relying on their house going up in price.