Bank of England Slashes Rates

[Mise]

http://news.bbc.co.uk/1/hi/business/7232304.stm

Bank cuts interest rates to 5.25%

The Bank of England's rate-setting committee has cut interest rates to 5.25% from 5.5% in an attempt to stimulate growth in the UK economy.
But the Bank of England said that growth needs to slow to keep inflation under control.

The decision follows recent rate cuts by the US Federal Reserve, which sliced rates from 4.25% to 3%.

Many analysts expect more UK cuts this year, but say inflation fears will stop the UK cutting rates as much as the US.

"Inflation at 2.1% in December was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months," the Bank's statement said.

The rate decision came shortly after E.On became the fifth major power company to raise gas and electricity prices this year.

Further cuts

The employers' organisation the CBI welcomed the cut and said it was pleased there had not been a bigger cut.


"It is clear that it is a delicate balance with inflation pressures," said the CBI's Ian McCafferty.

"A quarter point now and then watching very carefully for how inflation develops in the coming months is the best strategy."

But the British Chambers of Commerce disagreed.

"Threats to growth are much more acute now than risks of higher inflation, and we would have welcomed a bold UK move to 5% today," said its economic adviser David Kern.

Well not quite a slash, but a cut nonetheless.

I think this is a positive move. I feel that 5.25% is probably about right.

 

[classical_hero]

I wonder why Australia is going in the opposite direction compared most countries in the developed world?

 

[Dubai Vol]

I wonder why Australia is going in the opposite direction compared most countries in the developed world?

Because the Australian economy is booming and needs to be moderated? Because the government sees inflation as a greater threat than recession?

I don't know, but those are the classic reasons. Interest rates have become the main tool of governments to regulate the economy, and what they say about their moves is as important as the actual moves themselves.

 

[Mise]

I wonder why Australia is going in the opposite direction compared most countries in the developed world?

You're rich in minerals, which, due to the rapid expansion of China and India, are enjoying a massive boom atm. Plus your banks didn't play the CDO game like American, British and European banks did, so you're not so much in the firing line for that.

EDIT: I didn't have time to post my full thoughts earlier, and by now I've forgotten most of what I wanted to say... But the main point was that, last time, they voted 8-1 for a rate freeze, so how much could've changed in one month to make this choice different? Is this a darker sign?

Also, King seems accutely aware of the Moral Hazard problem, first in bailing banks out for their ridiculous lending, and then in bailing consumers out for their ridiculous borrowing. That's a good quality to have for a BoE governor, and it's more than I can say for Bernanke. I'm sure Bernanke has his reasons for huge cuts, and I was largely in favour of the first set, but the desperation he appears to show is in such stark contrast with King's conservative approach (and his comments that central banks are basically powerless to stop any recession!) makes me wonder just how two men in the same positions facing much the same problems can come to two completely different conclusions.