There are a two reasons why the rate cut might not help as much as hoped — and why a big rate cut was required.
The first, which has attracted the most attention, is that it may not be passed on in full to borrowers. The other is that interest is a smaller component of the cash outflows on loans than in the past.
At one level cuts may not be passed on because banks need to strengthen their balance sheets. More importantly, much lending is more risky (or perceived as such) and therefore larger risk premiums are needed than was the case a few months ago.
The impact of the falls in house prices is that many existing mortgages are not on as good security as they were. Even apart from those actually in negative equity, falls in house prices leave debt a higher proportion of the value of the property it is secured on, with, therefore, less margin to cover further falls.
Expectations for house prices have worsened — although I have long regarded property as risky, mortgage lenders clearly differed!
The weak economy will also mean that both individuals and companies will have less money to pay debt with. Redundancies and falling profits could both lead to more defaults. Yet more reason for higher risk premiums.
Moving on to the second problem, interest rates are already at historically very low levels. This means that they are a smaller component of the payments due on borrowing, so the effect of cuts on cash flows is proportionately smaller.
Incidentally, low inflation (which goes with low interest rates) also means that the real value of some types of debt (mortgages in particular) has not eroded over time as happened in the past. This means that mortgages have not really been more affordable than in the past, but just paid off more slowly.
So we have less affordable mortgages, rising risk premiums on both mortgages and corporate debt (which will become apparent as more and more debt gets rolled over at new levels), and less ability to pay. Even the drastic rate cut might not be enough.