You May Not Get The Full Rate Cut

Banking and Borrowing

Updated on 17 February 2009 | 18 Comments

Pundits are predicting a cut in the base rate this Thursday, but borrowers may not get the full cut.

As we head into recession the Bank of England looks set to cut its base rate this Thursday. The cut could be anything up to 1%. However, Fools shouldn't assume that rates on their loans and mortgages will be cut by the same amount. (Of course, Fools on a fixed-rate mortgage won't see a cut at all.)

Look at today's comments from a top executive at HSBC.

David Hodgkinson, the bank's chief operating officer told Bloomberg: `Credit has to be priced appropriately to reflect the risk. If interest rates are brought down significantly, then rates for borrowers will come down. But I'm not going to say it's absolutely linear because it depends on the particular transaction and the risk.'

What's more, HSBC has not received any cash from the UK government's bank bailout, so it can resist calls from Gordon Brown to cut rates and resume lending at 2007 levels.

I suspect HSBC isn't the only bank that is reluctant to make big cuts. We're now in a financial world where there are fewer players and hence, less competition. And recent events mean that banks will be much more focused on minimising risk in the next few years.

Libor

Still, there is some good news out. Libor continues to fall. The premium over the base rate is still exceptionally high, but at least it's falling. Today 3-month sterling Libor edged down from 5.84% to 5.77% while 3-month dollar Libor dropped 17 basis points to 2.85%. It's these falls in Libor that will drive falls in mortgage rates more than any other factor.

More: Some Good News For Borrowers

> Get mortgage advice from The Motley Fool Mortgage Service

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