In a battle to combat recession, the banks of the United Kingdom have reduced interest rate to 1 percent creating a historic record ever since their services. This cut rate of interest is supposed to be effective from next month onwards. The deduction in interest rate is a result of voting done by the monetary policy committee after judging and reviewing Britain’s poor economical situation. Both borrowers and homeowners are likely to welcome this reduced interest rate. Those homeowners who have £ 150,000 variable rate mortgage will find that their monthly payments have dropped to £565, a reduction by £45.

According to Michael Coogan, the director general of the Council of Mortgage Lenders, “While borrowers on tracker rates will welcome the rate cut, it is doubtful whether it will create the conditions to achieve significantly more new lending.” He has also opined that it is not going to be at all surprising if banks and building societies are trying to prioritize savers in this situation of very low interest rate.

On the other hand, business director of British Retail Consortium, Jane Milne is of the opinion that reducing interest rates are not going to prove as the only tool to fix the current recession. Cost of credit is not the key issue now, the main issue lies with the availability of the credit. According to her, “The Bank of England faces a fine balancing act between further weakening sterling and attempting to revive the economy. What we need now is better access to credit and a boost to consumer confidence.”

The British Economy and the Words of Charles Bean

Charles Bean, the deputy governor of the Bank of England has said that the British economy is going to perform worse than has been expected by the Bank of England. It requires further action from the monetary policy committee to press on the price rise back to reach its 2 percent target. To quote Bean, “It is possible that efforts to restore the banking system may take longer to bear fruit, and that the adoption of protectionist measures abroad as the downturn deepens may slow the recovery. Consequently the risks are heavily weighted to the downside, with roughly a three in four chance of growth turning out weaker than in the central case.”

Bean is also of the opinion that the monetary policy committee is supposed to take further action to combat recession and get back inflation to reach the objective in medium term. The central bank will buy the government bonds and other financial and economic assets so as to press down long-term interest rates in the economy and gear up the money supply in the market.

Interest Rate Cut and the Economist’s View
Howard Archer, the chief UK and European economist at IHS Global Insight states that the monetary policy committee minutes denotes that it is nearly impossible to tell when the Bank of England will engage in quantitative easing. Meanwhile, it is possible that the “Bank of England will cut interest rates by a further 50 basis points to just 0.50 percent in March.”