Interest rate cut - the result Thursday, October 09, 2008
In response to this blog post on why I felt calls to cut interest rates missed the point, I was contacted by someone last night via the IM widget on this blog who pointed out that a number of banks had cut their rates, contrary to my theme.
My response was that we should wait and see what happened to the interbank rates tomorrow i.e. Thursday. Well, at today's LIBOR fixing the cost of borrowing in dollars for three months in London soared to the highest level this year to 4.75%. Overnight rates were over 5% versus a Fed target of 1.5%. Meanwhile the TED spread, which difference between what banks and the Treasury pay to borrow money for three months increased to 412 basis points.
In Hong Kong, Singapore and Japan money market rates rose to their highest levels in at least nine months.
Clearly the reductions in mortgage rates will feed directly down to borrowers and should improve their lot, yet do you think the beneficiaries will be most likely to a) spend it or b) save it. If it's the latter then please explain to me how this will improve things in the economy.
Moreover, whilst the rate reductions benefit those with certain mortgages, there has been a vast contraction in the number of mortgage approvals in the last 12 months - rate cuts won't reverse this, as the problem in on the supply side.
In the same way that banning short sellers didn't stop markets falling, so dropping base rates isn't going to force banks to lend to each other.