大象传媒 NEWS | The Reporters

Why interest rates aren't falling

Robert Peston
2 Nov 08, 12:15 PM

Have you thought about taking your money out of the bank and stuffing it into socks under the mattress?

A few of you may even have hoarded a few extra notes, given the anecdotal evidence that demand for the fifty-pound denomination has been rising.

If it has crossed your mind to do just that, it's because you think there's been an increase in the risk of your bank running into the kind of trouble that meant you couldn't get your mits on your precious savings.

For what it's worth, I think it would be silly and irrational to empty your account.

But that's not really the point.

We all feel in an animalistic way that in an economic downturn, in a recession, the risk of lending - even to the bank - increases.

That's why banks are having to offer us higher interest rates to persuade us to put our money on deposit with them.

And really that's all you need to know to understand why the interest rates that households and businesses pay for loans have not come down as they normally do in line with the Bank of England's reductions in its policy rate, in what it calls its Bank Rate.

As it happens, the banking system is in better shape than it was only three or four weeks ago, when there was a genuine danger that our banks were going to stop lending anything to anyone at any interest rate.

But whoever you are, if you have money to lend, you want to be better rewarded for providing the loan - because you think (correctly) that the risks of lending have risen.

That's true if you are an individual depositing money in the bank (which is simply lending to the bank), if you are a bank lending to a small business or to someone wanting to buy a house, of if you are a money manager with billions to lend to other financial institutions.

To use the jargon, they (we) are all demanding a significantly increased "risk premium" for lending.

Now here's the bad news.

None of us can claim to know with total certainty how severe the coming economic downturn will be. Most of us are pretty sure we're in a recession, but we don't whether it will be short and sharp, or short and shallow, or long and shallow, or long and deep.

To put it another way, we can't be certain how many creditors - whether corporate or personal - will be unable to repay their debts.

Which means that this risk premium, the little extra we charge to compensate us for the possibility that we might not get all our money back, well that's floating around a bit at the moment.

We're feeling our way to an understanding of the appropriate margin over the Bank of England's policy rate that we should demand when lending.

What that means is that, right now, when the Bank of England cuts rates, it has the effect of boosting the profits of lenders - the banks and other financial institutions - rather than leading to sharp reductions in interest payments by borrowers.

If you are having difficulty keeping up the payments on a mortgage or a small-business loan, you'll think that's a scandal.

But it isn't a wholly terrible thing.

Even after raising all those billions in new capital from taxpayers, our banks need to strengthen their balance sheets further against rising losses on the tens of billions of pounds of imprudent loans they made over the past few years.

And one way to strengthen their balance sheets, to increase their capital resources, is to generate incremental profits.

Bust banks serve nobody.

That said, it would be very bad news for our economy if the Bank of England were to cut interest rates this week by the significant amount that most forecasters expect - somewhere in the range of 1/2 per cent to 1 1/2 per cent - and for almost none of that to have an impact on both the price and on the availability of credit in the real economy.

A contraction in the availability of credit is the main source of our current economic woes.

Even if mortgage rates don't fall much, even if the cost of loans to businesses doesn't drop signficantly, we may be in deep doo-doo if there isn't an increase in the supply of credit.