The Bank of England are playing a very dangerous game with interest rates. The flow of cash into personal bank deposits has dried up over the last four or so months. Before May 2008, UK high street banks could confidently expect an inflow of at least ₤2 billion every month into personal bank deposits. Since then, flows have become highly irratic. In October, flows were marginally negative.
It is now public policy to penalize savers. Negative real real interest rates and witholding tax have more or less destroyed any incentive to save. The government wants us to forget about the future and spend everything we have today. UK savers are behaving perfectly rationally, they have stopped putting new money into bank accounts.
Banks are now caught in a dilemma. Brown wants them to cut mortgage rates and keep on lending. The FSA wants them to build up their capital. The Bank of England have cut rates to ensure that anyone who has the temerity to save will be ruthlessly punished. In short, how will banks fund this additional lending when savers are beginning to desert traditional forms of savings.
None of it makes much sense.
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