Bank of England Cuts Rates – Again!

Bank of England Cuts Rates – Again!

The Bank of England has just made its fourth consecutive cut in the base rate, which now stands at just 1.5%. It’s the lowest rate ever set by the central bank, and could have a serious impact on UK borrowers and savers. If you have money put by, now’s the time to lock in to the best fixed savings rates available – before the last of them disappear…

The decision
At noon today, the Bank of England’s Monetary Policy Committee (MPC) voted to cut the base rate, which stood at 2% this morning, by 0.5%. It’s now set at 1.5%.

The lowest rate ever
Thus, the Bank of England base rate is the lowest it’s ever been in the institution’s 315 year history.

However, today’s cut isn’t as surprising as it is historic: it’s the fourth in a series of interest rate reductions by the Bank of England, which have seen the base rate plummet from 5% at the start of October to today’s new low.

The cut is likely to be welcomed by many economists, as evidence that Britain is entering a deep recession continues to mount. Recent house price data from the Nationwide and Halifax building societies show that property values declined around 16% during 2008, the largest annual drop on record – and further falls are expected in 2009.

Meanwhile, mortgage lending remains tight, high street stores are struggling and unemployment continues to increase. Just yesterday, retail giant Marks and Spencer announced it plans to cut over 1,200 jobs and close 27 stores.

By chopping the base rate to its lowest level since 1694, the MPC hopes to limit the pain caused by the economic downturn.

It’s impossible to be certain whether or not this will work – but how could this latest cut affect you?

If you’re a borrower…

You could benefit from today’s announcement. Anyone looking to remortgage will probably welcome the news – although banks are likely to increase the cost of new mortgage deals as the base rate declines.

People with existing variable rate and tracker mortgages should, in theory, save money as interest rates decrease.

However, not all banks will be keen, let alone quick, to pass on another interest rate cut to customers. Even borrowers with tracker mortgages may find their lender refusing to budge.

Some trackers come with ‘floors’ or ‘collars’, which prevent them from tracking the base rate to below a certain level – so check whether this applies to you. While some lenders decided to waive the right to invoke the collar on their tracker mortgages last month, they may do so after today’s cut. Nationwide has already announced that the 2.75% collar on some of its trackers will now be used, even though it did not apply it in December.

If you’re a user of personal loans, overdrafts or credit cards, it’s unlikely that today’s drop in base rate will influence the price you pay for your borrowing. Likewise, borrowers with fixed rate mortgages will gain nothing from the news.

If you’re a saver…
People who depend on savings for their income will have been hit hard by recent cuts in the base rate. Unfortunately, this new drop will add to their woes.

Those with sums put by should act fast to avoid further falls in interest. If you’re able to lock away your savings for a set period of time, you might choose to stash them in a fixed rate savings bond that offers a top rate.

At the moment, ICICI, the UK arm of an Indian bank, is offering a market-leading AER of 4.65%, fixed for one year. The minimum deposit required is £1,000, and there is no limit on how much you can save. However, you should avoid placing more than £50,000 with a single financial institution, as this is the maximum amount protected by the Financial Services Compensation Scheme.

Of course, you may not want to tie your savings into an account that offers no access to them – especially if you may need to make withdrawals. Unfortunately, the interest rates available on most easy access accounts are variable, and are likely to fall as the base rate declines.

At the moment, ING Direct’s Savings Account is offering a rate of 5% for new customers. It’s probable this will drop in the near future – but the account does offer a guarantee that savers will receive a return 2.17% above its standard savings rate for 12 months.

Is this the last of the cuts?
It could be that interest rates have now reached their lowest ebb. However, some economists believe the base rate will drop further, perhaps even to 0%, in 2009.

Today’s unprecedented decision emphasises just how serious the UK’s economic troubles are. It’s time for all of us to batten down the hatches, and protect our pockets in the best way we can.

**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**