Risk and reward as the Bank cuts the base rate to 1.5%


Via Bank of England cuts base rate to 1.5% | Business | guardian.co.uk :

The Bank of England’s monetary policy committee (MPC) has cut interest rates by half a percentage point to 1.5% – their lowest level since the central bank was founded more than 300 years ago.

And so we find the price of money has been forced to a historic low, just at the moment when demand and risk are high. And we wonder why loans are in short supply…

If we were discussing any other price control, we would most likely agree that price controls do not work. Sellers will not bring their products to market if they are compelled to sell them at too low a price. 

Suppose our product is money loaned at interest. Suppose the circumstances are such as to increase the risk of the loan not being repaid at all. We would want to charge more for the loan, but we find we are compelled to lend at lower rates or not at all. Of course, we decide not to lend.

Two potential solutions to this problem appear. One is a loan guarantee scheme which socializes risk to enable cheap lending. Another would be to allow interest rates to find their level in the market, that is, the price at which lending is worthwhile in the circumstances.

Labour is offering neither solution: they are considering printing money. That would further devalue our savings and incomes, storing more trouble for later as inflation.

One commentator tells us further intervention is required to make savers spend their money. Is everyone to be reduced to bankruptcy and dependency, or is it time for a new approach?

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