Will Lower Interest Rates Avoid Recession?

Around the world, Central Banks are cutting interest rates in the hope that they will avoid a serious recession. Lower interest interest can help boost economic growth because:
It reduces the cost of borrowing and therefore encourages firms to invest and consumers to spend. However, saving rates are already very low. Consumers might not want to borrow, even though it is cheaper because they fear the future. Also banks may be unwilling and unable to lend mortgages because of the credit crunch. In other words, lower interest rates may not encourage more borrowing in the current climate.

Lower interest rates reduce the cost of mortgage repayments. This increases the disposable income of consumers and reduces the number of mortgage defaults. Therefore, this helps increase consumer spending and will help halt the slide in house prices. This should act as a boost to economic growth.

Lower interest rates reduce the incentive to save, and therefore spending may increase.

Lower interest rates also cause a depreciation in the exchange rate. There is less demand for a currency like sterling. Therefore, it helps boost exports and economic growth. However, with many countries cutting interest rates, this may not help much. Also, the global slowdown means that export demand is likely to fall.

Lower interest rates will provide some help to economies in recession. However, it is not a panacea. There are many other significant problems (such as credit crunch) which a cut in interest rates doesn't solve.