Yesterday I spoke to someone running one of the smaller banks in the UK. He told me he lent less than he collected in deposits, for prudential reasons. He said he currently offered 2-3% on deposits, depending on size and length of time people would leave the bank with their money. He lent out at say 5-6% to reasonable prospects. They stopped following the Bank of England rates when they moved them below 2%, as they could not see how they could attract or maintain deposits if they followed the rate down.
It all made perfect sense to me. What a pity the authorities cannot understand this. I suppose they are setting their rates now with an eye on how much government stock they have to sell. In the real world depositors need a return, and banks need deposits. The UK authorities have not been in control of money markets or rates for almost two years now. Their destructive lurches in interest rates – first too low, then too high, now too low – have done damage. Today any sensible bank just ignores them.