Last week the IMF said the Bank should consider more quantitative easing and to “reassess the efficacy” of cutting rates below 0.5% to boost UK growth as part of its annual review.
UK interest rates have been held at a record low of 0.5% for 38 months and the Bank’s quantitative easing programme has purchased £325bn in assets so far. However UK GDP remains low and the latest figures from the Office for National Statistics revised first quarter GDP down from a 0.2% contraction to a contraction of 0.3% placing the country back in recession.
Ben Thompson, managing director at Legal & General Mortgage Club, said: “What seems clear to me is we have measures in place that will ultimately reduce the deficit however we need GDP growth and increased tax receipts to further help achieve this.
“If rate reductions and further QE is the answer then the government must find a way for this money to be released into the system to create more investment and employment. Banks must find a way to lend; growth will be very hard to realise without this.
“The problem is, we know why banks aren't lending as freely as they should and that's not a problem that I think can be fixed overnight.”
Eric Stoclet, chief executive officer at Crown Mortgage Management, said it was a tribute to the IMF that they were able to come up with recommendations that gave both the coalition and Labour ammunition to claim that both were right about the economy’s plight and what was needed to fix it.
He however added: “But the recipe sounds a lot like the “on the one hand and on the other hand” usually dished out by economists.
“Certainly the impact of a rate cut is unlikely to be meaningful with banks struggling to fund themselves and the margin for a cut being limited to a maximum of 50bps. Whatever a potential cut may be, it is only going to slow the increase in lending rates to the consumer resulting from the banks’ higher funding costs.
“As for corporates, many large companies are sitting on the strongest balance sheet they have had for years. They are holding off on investment because of the eurozone crisis, which is far from over, and the sharp fall in consumer spending, a result of deleveraging and the inflationary squeeze.”
Stoclet added that cheaper and more available lending may be what is needed for some SMEs but the impact would in all likelihood not be of a magnitude sufficient to make a difference to the economy.
He concluded: “Part of the solution rests in targeted infrastructure spending. That will clearly increase debt levels in the short run. But it should provide a boost to the economy and, if the money is well invested, potentially a long term boost in competitiveness.”
Fahim Antoniades, group director at Mortgage Centre IFA, said: “Over the past few months I’ve mentioned on record that it wouldn’t be misplaced for us to consider another rate cut; but it seems that after an unprecedented run of quite savage cuts to 0.5%, we hit an invisible psychological barrier where the sentiment has been “That’s got to be it, surely we can’t go any lower”. As with most things psychological, the rationale behind the sentiment is often illogical.”
Antoniades added that whilst another rate cut wouldn’t hurt, he couldn’t help but think that an opportunity had been missed in not doing it earlier.
He said: “Undoubtedly where rate cuts have had the biggest impact is in helping mortgagees on tracker rates – I can say personally that my mortgage payments have come down by 80% over the past four years.
“However the more time goes by, the more people come to the end of their tracker rates. Therefore the less pronounced the effect of putting money back in people’s pockets. Nevertheless, there are still many who are borrowing on tracker rates now who would benefit and, in my book, there are few things better at giving the economy a short-term shot in the arm than the feel-good factor of giving people back some spending power.”
