Thursday, 8 January 2009

A bad day for savers

So the Bank of England has decided to cut interest rates to its lowest level since it was set up in 1694 - 1.5%. While cutting them from October's 5% to "encourage lending" has done nothing to ease the ability to lend, cutting them again is hardly going to help.

Has the BoE fallen into the government's trap of borrowing and debt? Banks are unwilling to lend because of the likelihood of defaulting (as has caused the crisis in the first place) and instead needs to encourage saving.

If more money is invested in banks in saver's accounts, banks will now have more money to lend out - so more financial security. They will be more willing to lend, and will be more confident that borrowers will have savings to fall back on. As well as this, with savings, when times get hard people will have more money to spend, and will be less likely to go straight to the dole office for help.

This is exactly why saving should be encouraged - it is a long-term solution for financial security and to reduce welfare payments. That is why I am pleased that David Cameron has promised provisions for cutting income tax on savings, and although I'd hope for them to go further, it's a good start for stopping the country's spending binge and could also produce greater economic stability.

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