Aside from a certain former banking executive and his pension, the main discussion this week has seen many people in the industry and financial world talking about whether they would or they wouldn’t.

The answer came to light about an hour ago. They did.

The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.5 percentage points to 0.5%, and to undertake a programme of asset purchases of £75 billion financed by the issuance of central bank reserves. Never before have we seen a rate this low which was also accompanied with the news that the BOE would be pumping more money in to the country to help increase spending.

The statement from the Bank Of England website read:

“At its March meeting, the Committee noted that the February Inflation Report had implied a substantial risk of undershooting the 2% CPI inflation target in the medium term and that a further easing in monetary policy was likely to be needed.  Data released since the finalisation of the Report had not materially altered that prospect.  Accordingly, the Committee concluded that a further easing in the stance of monetary policy was warranted.  But the Committee also noted that a very low level of Bank Rate could have counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system.  On balance, the Committee decided to reduce Bank Rate by 0.5 percentage points, to 0.5%.

The Committee judged that this reduction in Bank Rate would by itself still leave a substantial risk of undershooting the 2% CPI inflation target in the medium term.  Accordingly, the Committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending to a level consistent with meeting the inflation target in the medium term.”

Like a boxing match, you will have two corners today, one of which will be dancing around the ring with their hands in the air, and the other who is sat on the stool with a feeling of a sharp kick in the stomach. If you have a tracker mortgage, today’s news will leave you feeling pleased, if not ecstatic, but if you rely on or have savings accounts, things are not looking so rosy.

So, when you go down the pub tonight, the people smiling have a mortgage, the people with half a pint, a gloomy look and possibly the hint of a tear in their eye have simply been doing what we have always been told to do, saving their money in a bank or savings account.

Another day, another rate cut…or so it seems at the moment.

Who would have thought 12 months ago that we would be in this position now? Economic measures are known to take a while to affect the economy, but with lending remaining tight, many believe it is not and will not be the required dose. However, with the intriguing news that house prices have surprisingly risen in January, are rate cuts the answer or should we really try something different?

Well, to answer the property surprise, it is likely that falling prices are more to do with renewed demand than a drop in rates.

Why? Well it is clear that the lower prices mean the market is now reachable for a new generation of first time buyers still eager to own their own home now they can afford to. That and the fact that successful Buy-to-Let investors are taking advantage of the value on offer are the key reasons. With interest rate cuts not being passed on by the lenders, this cannot be the overruling factor.

With the UK making a strong case for being bankrupt right now, the argument must therefore turn to other avenues for increased liquidity.

My argument is a simple one borne from experience in selling international property investment. There are plenty of people out there with surplus funds looking for something to do with them. Nothing they turn their attention to seems to work today. In today’s climate the area of funding may be the answer.

Therefore, I propose that Co-Op funding groups are formed (not fund run) to offer alternatives to institutional funding. Businesses which work in downtime growth markets making good margin but in need of quality funding are the natural avenues to pursue.

This why businesses that should survive and are well-run can benefit from the community and benefit the community with its produce; it’s win-win basically. We managed to put together a similar project for an ambulance stockist as many of you will know, with excellent results.

The idea is not new and has been used successfully through the centuries. So why not try it again? We’re all after a sense of community and forming these groups could significantly help local businesses and local economies get on their feet again. Co-op funders could be venturing with groups finding growth markets in a recession to ensure funding was funnelled in the right directions, maximising job potential.

It’s time to stop moaning about lack of tools to change the situation and start coming up with solutions. Just a thought…

Although interest rates are a funny old thing, sometimes good for us and sometimes not so, they play a vital and pivotal part of the UK’s financial stability and are used to try to control the economy.

According to Wikipedia :

“An interest rate is the price a borrower pays for the use of money they do not own, and the return a lender receives for deferring the use of funds, by lending it to the borrower. Interest rates are normally expressed as a percentage rate over the period of one year.

Interest rates targets are also a vital tool of monetary policy and are used to control variables like investment, inflation, and unemployment.”

History of Interest Rates

In the 17th Century, The Bank Of England was set up by William of Orange and proceeded to loan the Government of the time around one million pounds to help rebuild the country and help to finance wars and missions overseas. The early days of Interest Rates rarely saw any movement, with rates moving only twice in the 18th Century, moving lower and then increasing towards the end.

1840 saw the beginning of the rise and fall of interest rates, with the Bank of England moving rates many times from 1847 to the current day. The rates were changed by many things, war, economy and even the collapse of London bank, Overend, Gurney and Company caused the rates to rise a massive four times in May, finally hitting 10%, only the second occasion this had happened up until that point.

In 1890 the Bank of England had to bail out a major bank in Barings, which helped to avoid the collapse of the whole banking system due to heavy losses overseas, mainly in Argentina. Fast forward around 100 years and the interest rates hit their highest every peak to date, reaching a massive 17 percent, which introduced the early governing months of the Tory party, led by Margret Thatcher.

Despite a large rise in 1992 to avoid Black Wednesday, which was soon reversed, interest rates have generally fallen, which brings us all the way to 2009 where interest rates reached their lowest every point in their 300 year history, touching 1.5% as the UK faced recession.

What do Interest Rates mean to you?

As a general rule, if you do not own a home or have much in savings, they may not mean much.

When the interest rates are low, borrowers on tracker mortgages generally pay less per month for their mortgage as long as the lender passes the cut on, but your savings earn less in terms of interest. The opposite occurs when the rates are high, as borrowers on tracker mortgages generally pay more, but you earn more on your savings. Of course, borrowers on a fixed rate mortgage will be unaffected in terms of mortgage repayments.

Loans tend to be unaffected as a general rule, as most borrowers with a personal loan will be on a fixed rate. If recent events are any indication then rates for new customers are also unlikely to fall.

History has shown that the Bank of England has successfully controlled the finance of the UK by raising and lowering interest rates when needed, if this were not the case then we would be in serious trouble now. Although the latest cut does indicate significant problems ahead, taking this kind of action will help millions of people survive the next couple of years, and as for the question will they rise again, yes, of course they will, it’s only a matter of time … and more interest rate history will be made.

So another rate cut by the Bank of England to the lowest ever in its 315 year history; quite something!

The next couple of years will tell us whether these cuts will work or not, but it does seem in the short-term to be counter productive.  Retail banks are not lowering their mortgage rates because the LIBOR rate is too high, and the lowering of interest rates greatly affects savers at the very time when the government is asking us to save more!  Therefore it is questionable as to who it helps in the short term.  VAT has been reduced, but on the typical item of clothing, say at £30, this is hardly putting money back in people’s pockets.

There are even suggestions that the government will have to “expand the money supply”, which to you and me is printing more money and potential inflation.  If this happens, the question that follows is who gets this new printed money?  It’s our old friends the banks of course.  The government will buy assets in the banks in exchange for newly printed money.  However, I am pretty sure that was what happened in the recent bank bailout, no?

Ultimately, there may well be a shift in consciousness here.  We have been living in a false economy for some time built on credit that doesn’t seem to exist.  “Where has all the money gone” seems an apt question right now.  With debt levels so high, the money supply may have naturally contracted with the increasing payments people need to make.  The only action that may be logically left for the government is to increase the money supply to make up for the shortfall.  However, we are walking into an inflation minefield, the one the current Prime Minster said would never happen again.

I believe we need a mentality shift away from credit, and until drastic action is taken, such as cancelling large percentages of debt, the current problems may well persist.

..and as I write a short piece on the UK bailout plan, it has emerged that the Bank of England has cut interest rates by 0.5%…hardly surprising.

It does show, however, that the government is trying to curb a recession and in doing so is effectively allowing inflation to rise well above it’s stated long term immovable target of 2%.  A 2% inflation target, you will recall, is a measurement Mr. Brown has stated repeatedly over the last 10 years would be the benchmark for the economy.

It is also interesting to note that this cut in interest rates is not a UK action but appears to be a co-ordinated global action.  Canada , Sweden and Switzerland today have also cut interest rates by 0.5%.  China has also announced a second cut this month in a separate move.

Ultimately, will this work or are we fighting a slow death here?  I believe this is the start of many more cuts in the hope of stimulating the economy.  What people must realise is that we live in a false economy, heavily debted and over valued.  The lack of regulation, personal and corporate greed has contributed hugely and we are paying a very heavy price for this.

I don’t believe interest rate cuts are really the answer, although they will undoubtedly help homeowners on variable rates.  The single biggest problem in my view is the level of individual debt, and until this is resolved, either by cancelling all existing debt, or by heavily subsidising it, economies will not be stimulated to the level we need.