Turning rate thinking on its head

The common view expressed by many commentators since the previous announcement was “fix now before it’s too late”.

The thinking behind this view was a little muddled and in fact drove the market in an unwanted direction. It seems that after two massive OCR cuts of 1.50% each, the last one at just 50 basis points seemed too little (when in fact it was still large by historical measures).

People thought rates were as low as they could go and the call went out to “fix now”. The result was a little contrary as it forced banks to increase their medium and long-term loans significantly, partly as a way of controlling demand.

Added to this, people putting money onto deposits wanted a higher rate of return which too added further upward pressure on rates.