Bank of England cuts rates
Thursday, 5 February 2009 4:22 PM
By politics.co.uk staff
The Bank of England has cut interest rates by half a percentage point to a further record low of one per cent.
The cut today means the Bank rate has fallen from five per cent in October to the current level of one per cent.
Further cuts are now expected later in the year - taking interest rates to as close to zero per cent as technically possible.
Ladbrokes has slashed its odds of zero per cent interest rates to 8/1, from 20/1.
The monetary policy committee (MPC), explaining the decision, stated "The global economy is in the throes of a severe and synchronised downturn" and painted a dour picture of the UK economy.
However, the MPC claimed past interest rate cuts would have an effect - despite rate cuts not being passed on.
"The committee noted that, although the transmission mechanism of monetary policy was impaired, the past cuts in Bank rate would in due course nevertheless have a significant impact," the MPC statement read.
The MPC added there remained "a substantial risk" of inflation falling below its two per cent target for the consumer prices index (CPI).
"Accordingly, the committee concluded that a further reduction in Bank rate of 0.5 percentage points to 1.0 per cent was warranted this month," the MPC concluded.
For a borrower on a mortgage that drops by 0.5 per cent - repayments on a £150,000 repayment mortgage will fall by £43.49.
On an interest only mortgage, monthly repayments will drop by £62.50.
Lloyds TSB has already stated its standard variable rate (SVR) and tracker mortgages will match the Bank of England cut.
Not all other lenders are expected to follow suit, citing the need to balance interest rates for savers and borrowers.
Nationwide Building Society has already stated its tracker mortgage rates will not fall any further, although its SVR, or base mortgage rate (BMR), will drop as it has pledged it will never be more than two per cent above the Bank of England base rate.
The Council of Mortgage Lenders has also stated for mortgage lending to continue interest rates on savings accounts, and therefore mortgages, must not drop further.
"Naturally, borrowers on bank rate tracker mortgages would welcome a cut, but they are already paying low rates by historical standards and the interests of savers have begun to attract a higher profile within the current low interest rate environment," a CML spokesperson said.
"Given that lenders need to attract savers to help fund new mortgage lending, this is an important factor in sustaining and improving the flow of lending."
The body also doubted whether housing and mortgage markets would be boosted by any further cut.
The Building Societies Association (BSA) also called for more to help UK savers - who greatly outnumber borrowers.
Adrian Coles, BSA director general, said: "The rate cut is an assault on savers who will have seen their interest payments drop by 83 per cent since July 2007. Savers dependent on interest income have not seen prices fall by a similar amount - their lifestyles have taken a significant blow.
"But the decision is also bad news for mortgage borrowers. Although the cut will benefit borrowers with tracker or variable rate mortgages, research by BSA has found that concern over getting a mortgage or getting a large enough mortgage is a much greater worry than affording mortgage repayments.
"Against such a background, today's decision means that people are less likely to save and the flow of funds into the mortgage market will be further disrupted."
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