Last week's 25 basis point cut in the Bank of England's overnight lending rate is irrelevant window-dressing.
In terms of the real economy it is insignificant and meaningless. The stated argument behind such a measure is that it encourages consumers to spend rather than save, and encourages firms to invest (actual investment, i.e. buying additional machines, labour-power etc., rather than speculation, i.e. buying shares and other financial assets). The fallacy of that can be seen in the fact that, during the 1980's and 90's, interest rates were falling, but the consequence was not to stimulate such real economic activity, but to encourage speculation. Cheap credit meant that asset prices rose, and as asset prices rose, be it share prices, bond prices, or property prices, that simply encouraged even more of that cheap credit to flood into the purchase of those assets for fear of missing out. It created the asset price bubbles of the period after 1987, and their consequent bursting.
In the last 20 years, following the 2008 financial crash, we have had not just low interest rates, but near zero interest rates, and even negative real interest rates, when the effects of inflation are taken into consideration. Did that lead to a rush of consumption spending, and real capital accumulation? No, it led only to a further diversion of that liquidity into the purchase of existing financial and property assets, blowing up those asset price bubbles all over again. The only time we have seen increased liquidity go into a stimulation of actual consumption and real investment, is during lockdowns, and that was not a consequence of a reduction in Bank of England rates, but of the state physically handing currency to households. The further reason that led to a stimulation of economic activity is that, during lockdowns, those households could not spend money on various forms of consumption, and when that changed with the ending of lockdowns, they saw a consequent inflation - just as previous liquidity had created asset price inflation – which led them to try to buy before prices rose further.
Even then, the main effect in that last regard was in relation to larger purchases, such as cars. The reality is that for the vast bulk of day to day consumption, households rely not on credit, but on their own revenues, i.e. wages, rents, interest, profits. Although many households may use a credit card as a convenient way of paying for the weekly shop, the reality is that its not borrowing, because a large part of that is simply paid off, in full, at the end of the month, thereby, just taking advantage of a month of free credit, rather than using a debit card, or cash. Its unaffected by interest rates. For those who are in such desperate conditions that they do need to borrow just to pay for day to day consumption, they are already paying usurious rates to do so. Just look at the rates on credit cards, if you don't pay it off each month. If you are so desperate that you are paying 30% plus to buy necessities using a credit card, a 25 basis point cut by the Bank of England is not going to encourage you to buy more, and nor is it going to have any material impact on your debt payments. And, of course, other forms of credit are even more usurious than that.
If the state wanted to encourage additional consumption, the more effective means of doing so, therefore, would be to raise wages, in particular the minimum age. Its out of those wages that the vast majority pay for their day to day consumption, not from borrowing. A rise in the Minimum Wage, particular setting a Minimum Weekly Wage, would increase the revenues of specifically those workers who will use it to fund their day to day consumption, rather than them having to rely on food banks, or usurious credit. It would, also, facilitate a reduction in government spending, because with such higher minimum wages, the state would have less need to pay out benefits, such as Housing Benefit, and so on.
Of course, the state does not like to go down the road of such solutions, because higher relative wages means lower relative profits. Higher household incomes from higher wages, creates higher demand for wage goods. As Marx sets out in Value, Price and Profit, this higher demand for wage goods, then, means that firms, competing for this increased demand, have to increase their own spending, to increase their supply. They must buy additional machines, materials, and employ additional labour-power. The latter acts to push wages higher still. And, although these higher wages mean that firms' rate of profit falls, they still have to invest or lose market share. Indeed, although their rate of profit and relative profits overall, may fall, the increase in the mass of capital, results in a greater mass of profit.
What it does mean is that as firms invest to meet this rising demand, at the same time that relative profits fall, a greater proportion of their realised profits are retained to finance this investment. Less of them go into the money market, so the supply of loanable money-capital relatively declines, at the same time as the demand for it rises, to finance capital accumulation in general. Interest rates would, then, rise. But, that rise in interest rates would cause asset prices to fall. Falling asset prices, mean that the incentive to buy those assets, for fear of missing out, disappears, and so the dynamic of the last 40 years, in which liquidity has been sucked out of the real economy into that speculation, in order to inflate the paper wealth of the ruling class, which, today, owns its wealth in that form, would be undermined. Instead of realised profits going to buy back shares, and so on, the money would go to buy new factories, machines, materials and employ additional workers, stimulating real economic growth.
But, that is precisely why the state and central banks resist such a solution, because their goal is not economic expansion, but a protection of the interests of the ruling-class, and currently, that interest is inextricably tied to a maintenance, and preferably an inflation of the price of assets. The Bank of England's rate cut has nothing to do with stimulating economic activity, but only with trying to maintain asset prices. Even, in that regard it is irrelevant. As set out earlier, borrowing is only relevant in terms of larger purchases, such as cars, and notably houses. Its unlikely that this cut is going to stimulate domestic car demand in any meaningful way, and certainly not enough to offset the reduction in UK car exports to the US, resulting from Trump's tariffs. The best way of offsetting the effects of the latter, is via an expansion of the European domestic market, but Britain is also cut off from that, as a result of the idiotic Brexit decision, and the even more idiotic insistence of Starmer and Blue Labour to persist with it.
The consequence in relation to houses has been described previously. Cuts in interest rates do not act to stimulate additional supply of housing and construction. Lower interest rates cause asset prices to rise, as a result of capitalisation. In addition, lower interest rates that lead to lower mortgage rates leads to higher demand for existing houses. It is existing houses that account for around 85% of all transactions. The higher demand causes the prices of those houses to rise, and that forms the basis upon which builders then set the prices of the houses they build, even if the actual costs of building houses (materials, labour costs and so on) fall. That means surplus profits, which are extracted by landowners as rents/higher land prices. So, ironically, the effect of lower interest rates is to reduce the potential for increased house building and supply, even as it causes the demand for houses to rise!
But, in fact, the 25 basis point cut is unlikely to have any impact on demand either. Many house-buyers, now, have fixed rate mortgages, so a cut will not impact them. Others who have fixed rates that are coming to an end, fixed them five years ago, potentially at lower rates than they will now face.
All in all an irrelevant event.
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