Banks ignore Gordon Brown’s request to cut its borrowing cost

Even BOE has aggressively cut its interest rate in the two consecutive months by 140bps on November 6 and 100bps yesterday to 2%, as low as at anytime in its 300 years history. But banks as lenders are still not willing to cut its borrowing cost.

British Prime Minister, Gordon Brown, intensively urges banks to cut its borrowing cost but the Gordon Brown’s request is ignored by banks.

Here is from Telegraph:

In lowering rates again following last month's dramatic 1.5 percentage point reduction, the Bank of England itself hinted that base rate cuts were not enough to stop the economy sliding into a prolonged recession. The Bank of England will reduce interest rates even further as the economic downturn continues to bite.

Willem Buiter, of the London School of Economics, a former member of the Bank's Monetary Policy Committee, on Thursday called on the Bank to reduce rates to zero immediately, saying there was little point in "keeping its powder dry."

Roger Bootle, an economic adviser to the accountants Deloitte, said the Bank must cut rates "as far as it can", adding: "It won't be long before interest rates are reduced to 1 per cent, and they may ultimately have to fall all the way to zero."

The Bank is also now considering radical plans to pump cash directly into the economy – the nuclear option for when interest rate cuts fail.

The Government has begun considering contingency plans to nationalize the banking system if lending conditions do not improve soon.

As known, the main problem of the current credit market is evaporating credit confidence that was due to higher risk of credit default. Accordingly, even though the benchmark rate is dramatically reduced to zero percent as Willem Buiter and Roger Bootle saying, I think it would not directly impact on the easing credit tightened. Even, if the government really nationalizes the banking system.

The Government should restore credit confidence by regulating credit market as George Soros proposing on the current financial system reformation along with the bailout moves. If we look back in the past, when economy was very well, credit trust was high and default risk was very low and controllable. How much central banks set interest rate, lenders remained willing to lend, even lenders were totally private holding.

Related Posts :

ECB, BOE & Sweden cut rate; French unveiled a €26bn stimulus packages

Sources :

Telegraph: Banks under pressure to cut borrowing costs after rate cut, December 5, 2008 7:54AM GMT

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