Tags: Bank | England | Slashes | Interest | Rates

Bank of England Slashes Interest Rates

Thursday, 04 August 2005 12:00 AM

The Bank of England has cut interest rates by a quarter-point to 4.5% in order to combat weakened consumer and business spending, according to a recent Reuters report.

However, analysts believe England's central bank is not likely to reduce rates again anytime soon.

The bank's rate drop is the first in two years, and officials hope to salvage a British economy (the fourth-largest in the world) that has dramatically cooled off in recent years.

The BoE cautioned about elevated oil prices, which they feel could boost inflation in the very near future. However, they feel that Britain's rising stock market and a drop in the British pound bode well for England's economic future.

"This move represents a bit of economic fine-tuning ... with a view to shoring up domestic demand. Rates may fall further yet, but the [Bank of England] will not be in any great hurry," said Andrew McLaughlin, chief economist at the Royal Bank of Scotland Group.

The British rate cut leaves the central bank in a bit of a quandary.
Since its independence in 1997, when the Bank gained autonomy over interest rate decisions, it has never cut rates just once in a cycle. Rather when rates begin to fall, the Bank pushes through a series of cuts.

If the global economy continues to show signs of health, the next move in British rates may be more controversial.

2. Japan Finally Recovering From 'Lost Decade'

In 2002, Tokyo's Nikkei Dow index of 225 leading stocks was falling fast and reached a low of 8,197.

That year, the government set ambitious goals for 11 major banks to halve their bad loan levels during the next three years.

By the end of the Japanese fiscal year in March 2002, the ratio of bad loans to total lending assets stood at 8.4%. That news sent investors running for the hills, causing shares to fall a further 7.25% over fears that the endemic lending practices couldn't be fixed.

The Financial Services Agency reported that for the 2004 fiscal year, which just ended in March 2005, the ratio had declined to just 2.9%.

The Nikkei recently hit 11,913 and looks set to test April 2004's peak of 12,195.

Make no bones about it -- an economy without a healthy banking system cannot make progress. Japan, the world's No. 2 economy, should be applauded for the brisk progress it has made in dealing with lending practices turned sour.

Many Japanese banks are part of a larger "keiretsu" or corporate family. The term refers to the horizontal post-war structure linking banks and trading firms. Often, banks lent more money to "family members" on poor grounds -- for no other reason than they needed to be kept afloat.

Lending practices have been tightened as a necessary strategy in reviving the economy from a 15-year slumber. Cutting off the pinky ended up saving the hand in many cases, as some major companies were eradicated because banks refused further financing.

The 32% decline of bad loans during the recent fiscal year is more good news for Japan.

One banking supervision official said that "nonperforming loan resolution has entered a period of stability."

Additionally, banks are setting aside more reserves to cover loans -- to the tune of 80% of a loan's value. The value of real estate is also expanding relative to the book value of the loans based on the property in question.

And that's another encouraging sign of health for a country in which some real estate fell by more than 75% during Japan's "lost decade."

3. U.S. Savings Lowest Since Great Depression

The United States' savings rate in June fell to the second-lowest monthly rate since the Great Depression.

A Commerce Department report showed that the savings rate was just 0.02%, which was surpassed only by the -0.2% rate in October 2001, when Americans responded to patriotic promotions from auto companies following the 9/11 terrorist attacks.

Economists attribute the low savings rate to a June spending spree that was sparked by rising home prices, deep discounts from auto companies and easy access to credit cards, the Los Angeles Times reports.

For the first six months of this year, the nation's savings rate averaged 0.4%, which means Americans spent 99.6% of their after-tax earnings.

Based on the June rate, Americans earn $9.055 trillion after taxes annually but save only $1.9 billion, according to the Commerce Department.

The low savings rate is worrisome for several reasons.

For one thing, it raises alarms about the Baby Boom generation – which is now in its prime savings years – and boomers' ability to prosper in their retirement.

Also, businesses rely on savings for the investments that help them grow, and the deficit-plagued federal government is soaking up a large portion of those investments through borrowing

Andrew Tilton, an economist at Goldman Sachs, said rising home prices have made homeowners feel wealthy and encouraged them to spend more while saving less – and in many cases, to fund their spending by refinancing

"People expect the housing market to keep rising," he said. "It won't."


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The Bank of England has cut interest rates by a quarter-point to 4.5% in order to combat weakened consumer and business spending, according to a recent Reuters report.However, analysts believe England's central bank is not likely to reduce rates again anytime...
Thursday, 04 August 2005 12:00 AM
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