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Bank Of England Slashes Base Interest Rate by 1/3: Last Ditch Measure.

November 6th, 2008 No comments

The Bank Of England slashed the base rate by 1/3 reducing it from 4.5% to 3% in one move. There has never been a cut of more than 1% before. The Bank also stated that the economy is facing it’s worst crisis for one hundred years.

This attempt to get consumers borrowing and spending more fundamentally misses the causal problem of financial instability and actually exacerbates it. Are the British Government playing the same game as the US? The bank bail out package there is shamelessly being diverted to stronger banks to allow them to consolidate through acquisition of weaker banks, along with new tax rules allowing them to write off bad debts against tax in the year of acquisition.

It is clear that British banks will not be passing all or much of this rate cut on to their customers as they did not with the last one. They are claiming that bank lending costs have de-coupled from base rate. This is to some extent true although LIBOR is starting to fall.

It is an eerily similar claim to that from the gas companies who lifted prices claiming gas was linked to the cost of oil on the way up but did not reduce prices when oil started falling claiming the market for gas has “de-coupled” from the price of oil.

Unfortunately all this “de-coupling” makes it look like this is going to be a typical recession/depression with the poor and middle classes getting screwed and the rich intensifying their hold over the wealth of the world.

This is the most serious de-coupling of all: the separation of rich and poor and the concentration of wealth. This is the fundamental problem. Even if the banks pass on the cuts it does not get solved but worsened: poor and middle class families will take on more debt at a time when they can least afford it.

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