On 23rd January, the Government announced, to no-one’s surprise, that the UK was now officially in a recession. Measures taken to drag us out of the recession so far have been to:

• Make additional money available for short-term borrowing by banks so as to ease their funding needs
• Pump thousands of millions of pounds into the Banking sector, buying out debt in exchange for equity in the sector.
• Progressively and aggressively reduce the Bank of England base rate – to stimulate the economy

It is being widely predicted that interest rates will continue to fall to, perhaps, zero with another cut this week. The Chancellor is also talking about “Quantitative Easing”, which the uninitiated might be forgiven for thinking means “printing more money”. Perish the thought!

To date, very little seems to have worked and questions are being asked as to whether the present policy of interest rate reductions can, in fact, be made to work. Interest rates, on their own, seem to be the wrong tool to deal with this problem and, as we near zero, they can have less impact.

The problem is very much that banks are not lending to customers or small businesses. Specialist lenders who filled the gap in previous years are starved of cash and banks are hoarding money in case of a further crisis, thereby exacerbating the current one. Interest rates to customers are increasingly being driven by the banks willingness to lend and not by Government (or Bank of England) policy.

We need a radical re-think on how money makes the economy work. We need to reduce many of the risks banks are carrying so that they will free up their vast reserves and start lending again and at affordable rates. Maybe then we need to print more money so that this can happen. We will also need to remove that money from the economy as soon as possible so as not to stoke up inflation in the future.

The Government had better get this one right, and soon.

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Call us on 01752 561981 for a free, no-obligation discussion of your circumstances and we’ll see if we can help you move into that new home and get the right protection.

For further reading:

• http://www.telegraph.co.uk/finance/financetopics/recession/4321414/UK-recession-Its-now-official.html
• http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4362284/Banks-bail-out-package-still-short-on-detail.html
• http://www.cml.org.uk/cml/publications/marketcommentary