Lenders must fall into line for this gamble to pay off
BLIMEY. Hardly anyone saw that one coming. Suddenly, Mervyn King and his colleagues have gone from making the occasional trim to what a barber refers to as a "number one". The decision to cut interest rates by 1.5% to 3% really is the full monty — a no-holds barred savage cut.
Nobody should be fooled, though. They're not doing this out of feelings of benevolence to mortgage-owners. This is panic — they must believe things are in a terrible mess to take such drastic action.
But like the poker player who decides to go for it and puts all their chips on the next card, are they right to do so? To use another analogy, firing all your bullets in one go may kill your opponent but if you miss, there's nothing left in reserve.
The Americans have done similar, to no marked effect. The Bank — and we — must pray their shock tactic works. This is not a reduction that can be ignored by the banks — it must be passed on to consumers. To not do so invites wholesale rebellion against an already discredited industry.
The housing market may just get the kick it needs and shopkeepers might get a Christmas after all. The economy could splutter into life again. What the Bank is doing is chucking worries about inflation to one side. It's growth — or rather the lack of it — that dominates the thinking now. With figures coming out every day indicating the extent of the slowdown, the MPC clearly feels it cannot ignore what is occurring any longer.
That pressure to move has been intensified, oddly, by the few rare pieces of good news — commodity and food price rises are coming down, as is the cost of fuel. Any argument that rates needed to be kept high to maintain a brake on the economy had perished.
But will it be enough? Two other steps need to happen —both of which are outside the MPC's control. The banks must move to allow customers to reap the benefit of the drop and their own inter-bank lending rate, or Libor, also needs to fall.
The major banks are reviewing their positions. There is no question — they must fall into line. Libor is trickier — it's been falling but only slowly. Until that measure lowers significantly, then swathes of the economy will remain paralysed (if the banks do not even lend to each other, the chances of them allowing consumers and small businesses to borrow are slim).
Today's move is a kick in the right direction. It's courageous and it's a gamble. But for it to have any scintilla of hope, others must now respond in kind.
