UK Interest Rates Cut to 3% ‐ A Shock Move? Interviewer: Toby Thompson Interviewee: Séan Rickard 6th November, 2008 TT So today UK interest rates have been slashed down three per cent. I am sat with Séan Rickard, Senior Lecturer in Economics here at Cranfield. Séan, this shock one and a half percentage point cut in the UK rate, the lowest interest rate there has been since 1955, what do you thinking regarding this? SR I think the only shocking thing is that we have had to wait so many months for it. It has been pretty obvious now for some months that the Bank of England were out of line with what was really needed in the economy. They were focusing on inflation, when it was clear that inflation was going to come crashing down this year, yet they kept interest rates too high while they focused on inflation and meanwhile the economy slipped into recession. So yes, this is a big change now, its overdue and perhaps reflects a panic reaction that they realise they have got it wrong and that if they don’t act quickly now the economy is going into a very deep recession. TT So how long will it take for banks to pass this on in full to borrowers? SR Well, that is a difficult question. What we do know is that generally speaking it takes over a year for the effects of a cut in interest rates to feed through in full to the economy. Now there is a great deal of moral pressure on the banks at the moment, the Government are pointing out that they are shareholders in the banks, they are going to expect them to pass these sorts of cuts on to homeowners and indeed on to small businesses, so I think perhaps we will see it passed on sooner rather than later. But, to have a full effect, you need confidence to build behind it and therefore what we really have to do is wait for this cut to feed into the psyche of businesses, into the psyche of consumers, who are prepared once again to think about borrowing to invest in either their houses or their businesses. So don’t expect a massive reaction in the short run. What we should be looking at is that the benefits of this will be seen about June/July next year. In the latter half of 2009 when economic growth begins to take off again, we will be able to trace that back to this interest rate cut today. TT But surely this shows that the Bank of England are thinking that we are entering a recession. How long do you think this is going to last – when is it going to go on to? SR Well I have just said, we are apparently already in so‐called negative growth according to the official statistics. Everyone seems to forget that these are the most revised statistics that we have, but let us accept at the moment that our economy actually shrunk in the last quarter – one must expect that it is going to shrink further in this quarter, that would be technically a recession, and I would guess it will shrink again in the first quarter of next year. Sometime between the second and the third quarter next year we will move back into positive growth and by the fourth quarter of 2009 I think we will begin to see the economy growing quite strongly, with very low interest rates and very low inflation and hopefully we will begin to see unemployment coming down around that time. TT Séan, thank you very much.