There is a key economic indicator that shows why the Bank of England had to cut interest rates to a historic low of 0.25% this month — household finances.
Markit’s Household Finance Index for August recorded its highest reading in four months. In August, the index hit 44.9.
The index measures the rate at which people — households — are taking on debt and spending money. The higher the reading, the more confidence people have in the economy.
Basically, the Bank of England needed to cut interest rates to keep that number rising and keep the public spending.
“Although remaining below the 50.0 threshold to signal continued overall deterioration in household finances, the latest reading was nevertheless the highest in four months,” Markit said in its monthly report.
The logic is simple — when people are worried about the state of their finances, they stop spending, and when people stop spending, that can signal serious problems for the economy.
In May, household finances hit its lowest level in nearly two years and in July, there was a steep fall to 43.9. This means people aren’t confident and hits spending.
But low interest rates are meant to boost household finances. They are great for people in debt as it keeps the cost of borrowing cheap.
The rate cut, as well as the BOE’s £70 billion asset purchase programme, is part of the central bank’s stimulus programme. Low rates are meant to stimulate the economy as the make it cheaper to pay back debt, including mortgages, and keep people spending.
Jack Kennedy, a senior economist at Markit, says in a statement: “Concerns seem to have eased in line with the removal of some of the immediate political uncertainty arising from the shock referendum result, combined with a strong monetary policy response from the Bank of England aimed to cushion the economy and head off any lurch towards recession. In particular, those households with tracker mortgages will be seeing a swift beneficial impact on their finances.”
“Households were also reassured by a rebound in workplace activity levels, reflected in easing job security worries in the latest month. The survey’s prices indicators meanwhile suggest currently stable inflationary pressures facing consumers despite sterling’s weakness.”