Saturday, November 24, 2007
A lower Bank rate for the medium-term?
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Rachel Lomax's speech on Thursday has been scrutinised for hints on whether we will get a December Bank rate cut, but offered few hints on timing. But the deputy governor's speech did include some potentially important thoughts on the medium-term outlook for rates.

If we are heading into a sustained period when interest rates available to borrowers will be at a higher margin above Bank rate, the implication could be that Bank rate can be lower to achieve a given amount of monetary restraint. This is how she put it:

"What about possible longer term effects on the price and availability of credit?
Over the past three years, competition and financial innovation have put steady downward pressure on the rates at which banks have been prepared to lend, at any given level of Bank Rate. Between 2003 and the beginning of this year, 2-year-fixed mortgage rates fell by around 50bps relative to the wholesale interest rates they are usually priced off. This is one reason why credit has gone on rising so strongly, despite increases in official interest rates.

"At this stage, we can only speculate about what will happen next. My guess is that over the next 3-5 years, we will see a sustained though not necessarily complete - reversal in these trends, as banks re-appraise the risks around certain business models and complex financial instruments. This would increase the cost of credit to final borrowers, for any given policy rate." The full speech is here.

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