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What the interest rate cut means for you
By Rebecca Atkinson
The Bank of England's surprise 0.5% interest rate cut has been welcomed by the financial sector as not coming a moment too soon.
Actually, it came a day early - the central Bank's Monetary Policy Committee (MPC) meets once a month on a Thursday to discuss and vote on interest rates. This month, in a co-ordinated initiative with central banks from across the globe, the nine members voted on a Wednesday, deciding on a 0.5% interest rate cut in order to secure global stability.
The MPC's corresponding statement seems a little begrudging. It notes that inflation - which hit 4.7% in August - has yet to peak and will probably exceed 5% in the next few months. It also argues that an interest rate cut is not enough to "resolve the current problems in financial markets".
Despite this the cut was forthcoming. The MPC's statement reads: "During the past month, the balance of those risks to inflation in the medium term has shifted decisively to the downside. In the light of that outlook, the MPC judged at its October meeting that an immediate reduction in base rate of 0.5% to 4.5% was necessary to meet the 2% target for Consumer Price Index inflation in the medium term."
Reaction
Unsurprisingly, the reaction to the rate cut has mainly been positive.
Andrew Montlake, a partner at mortgage broker Cobalt Capital, says the move will hopefully bring some sanity back to the "schizophrenic" global market place.
And Douglas McWilliams, chief executive officer of the Centre for Economic Business Research, says the coordinated rate cut with other global central banks suggests the powers-that-be are now fully awake to the scale of the financial crisis in the markets.
"This move marks a key point in the financial element of the economic crisis," he explains. "Confidence should start to return, perhaps quite quickly."
But most experts agree the move is not enough to resolve the severe problems strangling the financial markets.
Stuart Law, chief executive of Assetz, says the 0.5% cut falls short of the mark: "I would urge the Bank of England to push forward with a full percent drop, bringing rates down to 4% as early as this week.
"However, base rate cuts will not solve all present issues."
McWilliams also calls for more interest rate cuts amid predictions that inflation will collapse in response to weakening demand and falling commodity prices.
"The UK in particular will need to cut rates persistently - perhaps to as low as 2% by the end of 2009," he predicts.
Savers
Saying that. unless you have a fixed-rate ISA or savings account, you are likely to see your interest rate reduce as a result of the latest cut.
This is bad news for those keen to make their nest eggs work as hard as possible. But it could also be taken as an opportunity to review your savings plan and where you keep your money.
In the current climate many savers are opting for security and ease of access over rate. This is a tough trade-off, and it will depend on your own circumstances and confidence in British banks whether you go for fixed-rate (where any access could see penalised) or variable rate.
Generally speaking, interest rates on fixed-interest accounts are more competitive and with the base rate expected to reduce further over the coming months, for many people these really might be the best place for your cash. Plus, with many offering online acces, if you really do need to move your money in a hurry you still can.
Borrowers
Adrian Coles, director-general of the Building Society Association, explains: "This reduction in base rate will provide some support to the housing market because it will help those borrowers on variable rates."
Peter Rollings, managing director of estate agent Marsh & Parsons, says: "A half percentage point cut in the base rate should allow lenders to lower their pricing on a lot of their products - and for those on tracker rates, the pain relief should be almost immediate."
However, many borrowers may not see the benefit of the rate cut.
Cole explains that new fixed-rate deals and those linked to money market rates will not necessarily fall because they are determined in the money markets rather than directly by the Bank of England base rate.
And Ann Robinson, director of consumer policy at uSwitch.com, adds: "For many homeowners coming to the end of a fixed rate deal, this could be the lifeline they need - but only if lenders pass on the full reduction.
"Unfortunately, mortgage providers are under a great deal of pressure as the Libor [the inter-bank exchange rate used to price fixed-rate mortgages] has been sky high for months. This means that mortgage providers are paying a premium to get their hands on cash to lend. Until this rate drops, lenders will continue to struggle to offer cheap deals."
Halifax and Barclays were the first two lenders to confirm 0.5% reductions to their SVRs.
Katie Tucker, technical manager at brokerage Mortgageforce, says banks are willing to cut new mortgage rates - if they can afford it.
She estimates that tracker mortgage borrowers will see their interest payments cut by £41 per every £100,000 of debt. However, people looking to take out a new tracker mortgage need to act quickly as some lenders may pull their products now to avoid losing margin.
The future
In the long-term, there is every chance he could be right. Experts have been calling for government intervention and interest rate cuts for some time, and now that this has happened everybody will be crossing their fingers for some good news.
But for British households coping with the rising cost of living, reduced borrowing opportunities and grim economic climate, the next few months will continue to be tough.
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