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Thursday 4 December 2008

2% Interest Rates - what will the banks do?

Well, I think it's fair to say that the Bank of England are no longer pulling their punches. Interest rates are now at 2% and forecast to drop further in the new year. I have even heard talk of the base rate dropping to zero!

Hopefully this now starts to filter through to businesses, although for most businesses I come across, it is access to borrowing rather than the rate that is the problem.

We may find that the banks still don't pass on the rate-cuts and use the extra margin to bolster their balance sheets. Obviously there has to come a point when they no longer need to do this and they clearly need to lend to somebody to earn any money. Hopefully that point is now closer with this further rate cut.

As usual, Robert Peston at the BBC has an interesting analysis of the problem and the dilemma the banks have got themselves in.

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