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Taking interest rates to new low not enough to revive economy

Taking interest rates to a new historical low of 0.5% is not enough to revive the weak economy, according to University of Warwick economics expert.

Assistant Professor of Economics Michael McMahon said few households and businesses in the economy would be positively affected by the slashed interest rates.

He said: "The 50 basis point cut by the Bank of England, although taking interest rates to a new historical low of 0.5%, is unlikely to stimulate the weak economy by itself. Very few households and businesses in the economy will be positively affected by this move.

"Those with fixed rates on their debt will see no change, those on standard variable rates will rely on the commercial banks passing on the cut which is unlikely to happen in full, if at all, and even those with tracker rate mortgages (those you would expect to gain automatically) often have capped lower levels below which changes are not passed on. Only those who have savings are certain to see things; banks are likely to cut deposit and saving rates of interest meaning these people will lose out."

Dr McMahon added that The Bank of England had also today (5) announced a new UK method to help expand the amount of money in the economy.

He said: "The Bank of England now has permission from the Treasury to buy assets from the private sector in an effort to increase the amount of money that banks have and, so long as they do not hoard this, they can use this money to increase the amount that they lend to the corporate and household sector.

"While this is the hope, the experience of Japan, who tried similar 'quantitative easing' earlier this decade, does not suggest that we have a new magic wand that will magically fix the 'broken' UK economy. Despite this pessimism, I believe that the Bank of England and the UK authorities are right to try everything in order to limit the impact of this already relatively large recession, and to avoid the potential for deflation from this." 

 Assistant Professor Michael McMahon is available for interview, his contact details are, (0) 24 7652 3056.