The Bank of England have announced another cut in interest rates to their lowest levels since 1951, it is great to see some top level action but how will this help and is it the best we can do?

Firstly, lowering interest rates should have a positive effect for homeowners, cutting their monthly repayments and putting “money back in their pockets”.  It is also possible that lower interest rates will mean more purchases of homes with the better deals that could be available.  This is assuming of course that the lenders pass these cuts on and improve lending conditions.

However, the burning question must be: are we tackling the cause of the problem or handling the effects?  Ultimately, the major problem as I see it is the level of personal debt, not just with mortgages but credit cards.  Consumers who are “maxed out” on credit cards and just about covering their monthly commitments will not be able to increase spending on the back of numerous interest rate cuts.  Banks will not feel more assured to lend to consumers, or businesses, if the current debt has not been reduced.

The government, to its credit, has started discussing mortgage holidays until economic conditions improve.  This is a start but a start only.  If the government really wishes to stimulate spending, then the only way will be to create in the first instance, credit card debt holidays, and ultimately a cancelling of a % of credit card debt to increase consumption.  Many will argue that borrowers got themselves into this state and therefore should get themselves out of it alone.  However, with banks being granted bailouts, why shouldn’t this program be expanded to include a consumer bailout?

It goes against the capitalist mindset, but the financial precedent has been set.  Only once personal debt has been reduced will banks feel more secure in lending, spending will then increase and the economy can return to a period of growth.  Whether credit card companies feel the same way is another matter…