|
| Personal finance articles |
|
|
|
Historic interest rate cut expected
By Rebecca Atkinson
The Bank of England is set to vote for another interest rate cut this week, bringing the base rate to below 2% for the first time since the central bank was founded in 1694.
If the central bank's Monetary Policy Committee (MPC) does cut rates this month, then January will be the fourth consecutive month the base rate has been reduced; in October it fell by 0.5% to 4.5%, in November the MPC unveiled a surprise 1.5% cut to 3% and in December it voted to lower rates by 100 basis points to just 2%.
But the MPC has indicated that rates need to fall even lower. The minutes from their December meeting show the nine members did discuss cutting rates by more than 1%, but eventually ruled this move out amid fears it could signal a lack of confidence in the economy and damage the value of the pound.
Moves in America, where the Federal Reserve cut rates to a record low of between 0% and 0.25% last month, have also paved the way for further cuts in this country.
Bearish forecasting group Capital Economics believes that, in light of the deteriorating economic situation, the Bank of England could even go the whole hog and reduce interest rates to zero over the next few months. It predicts another 100 basis point reduction this week, which will be matched in February.
Vicky Redwood, UK economist at Capital Economics, says that although the MPC has noted the big reduction in the base rate over a short period (from 5% in October to the present 2%), the rise in unemployment, contracting economic growth and fall in house prices all support the view that rates need to fall further.
As well as lowering rates further, Redwood believes more must be done by the Government to re-start the mortgage market.
"There is little indication that the Government's recapitalisation of the banks is succeeding in getting them lending," she says. "[…] the longer the Government takes to introduce more measures, the bigger the damage to the economy from the credit crunch in the meantime."
Recent reports suggest Gordon Brown and his chancellor Alistair Darling are considering another bank bail-out plan that will allow struggling firms to reduce their exposure to bad debts. However, Darling has stated that this was not the only, or most preferable, option on the table.
In the meantime, the chances are high that the MPC will reduce interest rates further this Thursday (8 January). If it does, this will be the first time the base rate has fallen to below 2% in the Bank of England's history.
But will lower rates benefit borrowers?
According to data provider Moneyfacts, one month on from December's 1% cut and many banks have been quick to slash savings rates but altogether slower to reduce mortgage costs.
It reports that 77% of providers have cut their savings rates with the majority opting to pass on the full cut or more. The average savings rate on a no-notice account now stands at 1.48%, with 38% of the accounts paying a rate of 1% or less, according to Moneyfacts.
One the plus side, 10 providers decreased savings rate by less than the 1% base rate reduction, including Anglo Irish Bank, Marks & Spencer Money and Manchester Building Society.
In contrast, Moneyfacts says that while 76% of mortgage lenders have announced a cut to their standard variable rate (SVR), only 19 lenders have opted to pass the cut on in full.
Almost three-quarters (72%) of those to have announced cuts opted to pass on between 0.15% and 0.99%, amongst them some of the UK's biggest mortgage lenders.
Michelle Slade, analyst at Moneyfacts, says: "Moneyfacts has been recording savings rates since 1988 and if base rate is cut further this week as predicted we are likely to see the average savings rate drop to the lowest level ever seen. [However] With each base rate cut, the number of lenders passing the cut on in full to their SVR continues to dwindle. It is likely that some lenders have already cut rates as low as they are prepared to go."
Indeed, Nationwide recently announced that it would not decrease the rates on tracker mortgages even if the base rate does reduce again this week. The building society has a "collar" clause in its contract with 250,000 tracker customers that allows it to stop decreasing tracker rates once the Bank of England's base rate falls below 2.75%.
Although it did not enforce this clause in December when the base rate fell to 2%, it says its rates will not fall any lower.
However, Redwood says lower interest are making a difference to consumers, "[Apart from Nationwide] lenders have insisted they have no plans to introduce collars. Meanwhile, lower official rates could still pull down longer-term interest rates, as well as providing at least some boost to confidence," she explains.
Useful links:
|
Send Article by Email
Send Article by IM
Blog This with Y! 360
Printable View