February 2009 – UK policy rates cut to historic low of 1%

The Bank of England’s Monetary Policy Committee (MPC) has lowered the Bank Rate by 50bps to 1.00%.

The UK is in recession – indeed the cumulative output in the last two quarters has been 2.1% – close to the 2.6% peak-to-trough decline recorded in the last recession in the early 1990s. There is much further to go in the downswing.

Despite the sharp fall in sterling and cheaper borrowing costs, corporate Britain is contracting at a rapid rate. Exports might have been expected to absorb some of the spare capacity – but depressed overseas demand is a big obstacle to stage an export-led recovery.

Consumers have become net borrowers over the last ten years and a rebalancing of the economy is needed in favour of a higher level of household saving. The savings ratio will probably have to climb to 5 per cent of disposable income or higher in order to pay off existing debts and rebuild household balance sheets. But saving is more difficult during a recession and when the average returns on deposit accounts are so low. For the time being, the Bank of England has signaled that irate savers are playing second fiddle to the need to prevent a calamitous collapse in output and jobs.

Economists at the Royal Bank of Scotland estimated that a sudden increase in saving could bring about the worst ever recession in modern UK history.

“To take their savings ratio back up to target, households will have to shift from net borrowing to the tune of £30bn in 2008 to net saving of some £45bn – a swing of £75bn. If this adjustment were to happen abruptly (this year only), it would shave roughly 5 percentage points off GDP growth.”

A student chart-based handout covering this interest rate decision is available by clicking on the download link below:

Download student worksheet

Investment in Energy Infrastructure [23 May 2012]
Unit 2 Macro: Cyclical and Structural Economic Issues Facing the UK [23 May 2012]
Unit 2 Macro: Evaluation on Supply-Side Policies [21 May 2012]
Unit 2 Macro: Migration and the UK Economy [20 May 2012]
Unit 2 Macro: Positive and Negative Multiplier Effects [20 May 2012]
Unit 2 Macro: The Importance of Productivity [20 May 2012]
Unit 2 Macro: Human Development Index (HDI) [20 May 2012]
Q&A: What do we need to know about output gaps? [20 May 2012]
Unit 2 Macro: The Output Gap [20 May 2012]
Revision notes on unemployment [20 May 2012]
Unit 2 Macro: Bank Cuts UK growth Forecast for 2012 [16 May 2012]
Grexit - Andrew Balls on Greece and the Euro [16 May 2012]
Unit 1 Micro: Price Elasticity of Supply [13 May 2012]
Unit 2 Macro: Revision Notes on Supply-side Policies [10 May 2012]
Unit 2 Macro: Model answer for revision data question [9 May 2012]
Unit 2 Macro: Exchange Rates Glossary [5 May 2012]
Unit 2 Macro: Growth and Development Glossary [5 May 2012]
Unit 2 Macro: Unemployment Glossary [5 May 2012]
Unit 2 Macro: Fiscal Policy Glossary [5 May 2012]
Unit 2 Macro: Economic Cycle Glossary [5 May 2012]
Unit 2 Macro: Aggregate Demand Glossary [5 May 2012]
Macro Revision - Key Statistics on the UK Economy [4 May 2012]
Macro Revision: Putting Things in Context [29 Apr 2012]
Unit 2 Macro: Britain back in Recession [29 Apr 2012]
Tullow Oil and African Development [25 Apr 2012]
Unit 4 Macro: The Euro Zone Crisis (Revision) [22 Apr 2012]
Unit 2 Macro: Heathow’s Capacity and Connectivity Crunch [22 Apr 2012]
Unit 4 Macro: Managing the Global Commons - Limits to GDP [15 Apr 2012]
Unit 2 Macro: Skills Shortages Hold Back Recovery [12 Apr 2012]
Unit 2 Macro: How the Economic Cycle affects Businesses [6 Apr 2012]
Unit 1 Micro: Revision on Price Elasticity of Supply [5 Apr 2012]
Unit 2 Macro: The UK Balance of Payments in 2011 [4 Apr 2012]
Unit 2 Macro: Revision on Interest Rates and the Exchange Rate [3 Apr 2012]
Unit 4 Macro: Productivity Improvements in China [3 Apr 2012]
Unit 1 Micro: The Collapsing Price of Carbon [3 Apr 2012]
Unit 4 Macro: Floating and Managed Floating Exchange Rates [2 Apr 2012]
Unit 2 Macro: Revision on Real Economic Data [2 Apr 2012]
Unit 4 Macro: Pain in Spain as Fiscal Austerity Bites [1 Apr 2012]
Unit 2 Macro: Gross National Happiness in Bhutan [31 Mar 2012]
Unit 3 Micro: Revision on Fixed and Variable Costs [31 Mar 2012]
Posen on slower growth in the UK compared to the USA [30 Mar 2012]
Unit 2 Macro: Revision on Capital Investment [30 Mar 2012]
Global Economy- the 2012 BRICS Summit [28 Mar 2012]
Intergenerational Equity - Fairness and the Slump [28 Mar 2012]
Life in the Slow Lane - UK Growth in 2011 Lags the Euro Area [28 Mar 2012]
George Buckley at the Millfield Economics Society [28 Mar 2012]
Unit 4 Macro: Evaluating 3 Years of Quantitative Easing [27 Mar 2012]
Unit 1 Micro: The Tax on Beer [16 Mar 2012]
Unit 1 Micro: Inequality - The Rise of Fuel Poverty [15 Mar 2012]
Unit 2 Macro: Policies to Drive Economic Recovery [9 Mar 2012]
Unit 2 Macro: Might Oil Prices Bring another Recession? [4 Mar 2012]
Unit 2 Macro: The Dash for Gas in Mozambique [17 Feb 2012]
Unit 4 Macro: King on the UK Economy [15 Feb 2012]
Stephanie Flanders explains Quantitative Easing in 60 seconds [9 Feb 2012]
Unit 4 Macro: Focus on India - Comparative Advantage [27 Jan 2012]
Unit 2 Macro: Focus on China - Trade and Growth [27 Jan 2012]
Unit 2 Macro: Focus on China - Carbon Emissions and Growth [26 Jan 2012]
Unit 2 Macro: Focus on China - Per Capita Incomes [26 Jan 2012]
Unit 2 Macro: Focus on China - Changing Economic Structure [26 Jan 2012]
Unit 4 Macro: Focus on India - Economic Growth [24 Jan 2012]
Unit 4 Macro: Money, Debt and the New World Order [22 Jan 2012]
Unit 3 Micro: World’s Largest Solar Plant Opens [15 Jan 2012]
Unit 4 Macro: Economics of Fiscal Deficit Reduction [12 Jan 2012]
Unit 4 Macro: UK Bond Yields Reach Record Lows [11 Jan 2012]
Unit 2 Macro: Factors Driving Business Investment [10 Jan 2012]
Unit 2 Macro: Quantitative Easing in the UK [8 Jan 2012]
2011 in Review - The US Economy [27 Dec 2011]
Unit 2 Macro: The UK Housing Market in 2011 [26 Dec 2011]
Unit 2 Macro: Brazil Overtakes UK in Economic Size [26 Dec 2011]
Unit 3 Micro: Sub Normal Profits - BP Leaves the Solar Industry [21 Dec 2011]
Unit 4 Macro: The Rise in Self Employment [17 Dec 2011]
Unit 4 Macro: Does UK Manufacturing have a Future? [30 Nov 2011]
Where is the UK Economy? National Output [22 Nov 2011]
AS Macro: The State of British Business [13 Nov 2011]
Unit 2 Macro: Video Clips on Unemployment [6 Nov 2011]
Unit 3 Micro: Impulses to Change Management Models [5 Nov 2011]
Unit 3 Micro: Time of Use Pricing for Energy [2 Nov 2011]
Unit 2 Macro: A New £50 comes into circulation [2 Nov 2011]
AS and A2 Macro: GDP resources from Planet Money [31 Oct 2011]
Can the “invisible hand” solve Africa’s poverty? [13 Oct 2011]
Keynes Prize: The Economics of Cities (2) [13 Oct 2011]
Keynes Prize: The Economics of Cities (1) [12 Oct 2011]
UK Unemployment in October 2011 [12 Oct 2011]
Unit 4 Macro: Unit Labour Costs and Inflation [12 Oct 2011]
Unit 2 Macro: UK suffers a weak recovery [12 Oct 2011]
Why Is Macroeconomics Such A Mess? [11 Oct 2011]
Unit 2 Macro: Exercise on National income [27 Sep 2011]
Unit 4 Macro: Greek Economy at Default’s Door [25 Sep 2011]
Unit 4 Macro: IMF Flags up Risks of Double Dip [20 Sep 2011]
Unit 3 Micro: Fixed and Variable Costs [18 Sep 2011]
Unit 2 Macro: Interest Rates and Income Inequality [16 Sep 2011]
Study Note - Measuring national income [16 Sep 2011]
Study Note - Value Added and Contributions to a Nation’s GDP [16 Sep 2011]
Study Note - Introduction to GDP [15 Sep 2011]
Unit 2 Macro: Economic Growth and Inequality [14 Sep 2011]
Study Note - What is Macroeconomics? [13 Sep 2011]
Unit 2 Macro: Income and Wealth in the UK [12 Sep 2011]
UK Macro: Risks of a Double Dip Recession [12 Sep 2011]
Unit 2 Macro: Value Added in Production and GDP [11 Sep 2011]
Mixing with the Nobel Economists [4 Sep 2011]

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