BofE interest rate cut: yet another Brexit stupidity or political?

‘For God’s sake, DO SOMEthing!’ must have been the thinking at the Bank of England when cutting interest rates to 0.25%. This appears to be knee-jerk monetary policy: leading economic indicators are way down, so let’s cut rates….

That the UK economy is slumping following the Brexit vote is obvious: PMI’s in services and manufacturing have shown the most rapid declines and / or the lowest points in many, many years. Construction output also dropped significantly. Anecdotally, domestic businesses have indicated they will slow down investments. Overseas businesses have no reason to invest in the UK until Brexit terms are known. The housing market, already significantly slowed by Osborne’s stamp-duty tax, is since Brexit completely dead. Corporate deals are being pulled or delayed. Pound Sterling was down against the US Dollar 9% since the Brexit vote, 12% since the end of 2015 and 22% since the middle of 2014. The Pound is down 1.5% since the BofE rate cut.

However, NONE of this slowdown is a function of too much debt. Prior to Brexit the UK economy was motoring along quite nicely, thank you very much. Clearly, financing was not a problem. Quite the contrary, economists but notably politicians started to worry that house-prices had catapulted through the roof in a typical asset bubble driven by, you guessed it, already low interest rates.

Loud had been the criticism that prolonged low interest rates were creating havoc with savings of individuals and slashing the returns on pension funds.

So what does the BofE do? It cuts interest rates, yippee! The Association of Mortgage lenders says that 11.1 million households have average debt of £116,000, but 46% have fixed rate mortgages. You calculate that through and a 0.25% rate cut means a potential saving on interest payments of £1.5 billion, maximum. That is if, and a big if, the banks on another 29% of mortgages pass on all the savings to the borrower. On a total UK economy of £1.9 trillion (that is a 1 with 12 zero’s) the net savings is 0.08% or £23 for every of the 64 million citizens in the UK over the course of a year. Don’t spend it all in one place!

Other than the 15% of the 18.7 million UK households with total variable rate mortgages who will benefit from the rate cut and the 17% who might benefit, nobody else in the UK economy will derive any gains from the rate cut.

Without clarity on post-Brexit terms of trade, no business big or small will invest. Without clarity on post-Brexit Financial regulation, no bank, or other finance company will hire employees for new ventures in the UK. Without clarity on immigration, none of the 3.3 million EU citizens will decide on buying property.

In short, the economic slowdown is a crisis of confidence, not a crisis of debt! The actions of the BofE will have zero impact on the economic statistics going forward.

But WAIT, nobody will benefit? Of course, one entity will: your friendly British Government! UK national debt stands at £1.6 trillion (again, those 12 zeros). The 0.25% lower interest rates is a net savings of £4.0 billion (you got it £4,000,000,000) per year for Prime Minister May and partners-in-crime.

So, that’s what it is all about: the £325 million-a-week in EU savings that never was (repeatedly proven to be a lie) is now going to be paid out of the National Budget on the back of savers and pensioners. Real smart…..

4 August 2016