Banks still need our money
The Bank of England's quarter per cent cut in interest rates may not be bad for savers, writes Paul Lewis
For most journalists a cut in interest rates is a good thing. They are mainly young and their mortgages will be cheaper. And of course it genuinely is good news for those who are struggling to buy their home. But for people with cash – mainly the over 50s – a rate cut is bad because their income goes down.
But not this time. Because the banks are desperate for that money. That's why the interest paid on savings will stay high despite Thursday's cut in interest rates announced by the Bank of England. You can currently get 6.97% if you put your savings in Birmingham Midshires for three months. Or 6.85% with ICICI for a year. Those rates may not last. But although some mortgage rates fell within minutes of the Bank's announcement, no savings rates have been cut yet.
Banks need our cash because they have stopped lending to each other. The credit crunch – as it is called – started in America when greedy sales staff and the banks they worked for sold mortgages to people who could not afford to buy a home. The banks packaged up these risky mortgages with a lot of good ones and then sliced that debt package into bits and sold them to investors. They sold them on again. And so on until no-one knew where these risky debts were or who had them.
This risky debt became poisonous when American borrowers started defaulting on their loans and the price of houses there fell. So it could not be repaid even if homes were repossessed. Banks stopped lending to each other in case the toxic debt was passed to them.
That has gummed up the whole financial carousel which drives the world's economy. But the banks still need money. Ours.
So expect rates paid to savers to stay high despite this week's quarter-point cut and despite the next one expected in February.
There is one cloud on the horizon. Inflation. It is above the Bank's target and rising. Normally the Bank would bring down inflation by putting interest rates up. Or at least keep them level. Instead it tried to un-gum the economy by cutting them. That could push up inflation. And if one thing is the enemy of savings it is price rises that make money worth less.
By cutting rates the Bank is taking a chance. And it's our money it's taking it with.
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