Base Rate Cut To All-Time Low Of 1.5%

The Bank of England has cut its base rate by 0.5%, the fourth monthly cut in a row. It now stands at a record low of 1.5%.

At noon today, the Monetary Policy Committee of the Bank of England cut the Bank's base rate by half a percentage point to just 1.5% a year. Thus, for the first time in its 315-year history, the Bank has a base rate below 2%. The Bank of England was founded in 1694, during the reign of William and Mary, so this is truly an historic and unprecedented decision!

A bonanza for borrowers?

The base rate stood at 5% before the rate cut on 9 October, so it's fallen a long way in a short time. More than anything else, this indicates the Bank's desperation to avoid a long and deep recession taking hold in the UK. By cutting its base rate, the Bank hopes to lower borrowing costs for companies and consumers, helping them to weather the coming economic storm.

The Bank's decision will be welcomed by Britain's 11.8 million mortgage borrowers, many of whom will see yet another reduction in their main housing expense. However, roughly half of all borrowers have a fixed-rate mortgage, so these folk will not benefit. Furthermore, several lenders have indicated that they will not pass on this and any more rate cuts to customers on trackers with collars, leaving more borrowers disappointed.

Not all borrowers will be winners

However, most homeowners with tracker mortgages will be cracking open the Champagne, as most will benefit immediately from this latest rate cut. Indeed, those with interest-only mortgages may have seen their monthly mortgage repayments halve in just four months! In some cases, borrowers will be hundreds of pounds a month -- or thousands of pounds a year -- better off. The government hopes that this disposable income will be spent, helping to prop up our ailing economy.

Alas, the cost of unsecured (non-mortgage) borrowing is unlikely to be much affected by this latest cut. Credit cards and store cards will continue to charge double-digit interest rates, plus the cost of overdrafts is likely to remain largely unchanged. Then again, businesses large and small will welcome any reduction in their borrowing cost, no matter how small. However, it remains to be seen whether cash-strapped lenders will pass on the base-rate cut in the form of lower loan and overdraft rates.

A slap in the face for savers

The yearly interest rate paid by some savings accounts has tumbled from over 5% to below 2%, more than halving the return on cash. Thus, the UK's prudent savers will suffer in order to bail out feckless and reckless borrowers. Many savers will see their cash pots shrivel as they are forced to dip into their capital in order to subsidise daily living.

As a group, pensioners will be worse off, as most have savings but few have large debts. Indeed, many retired people rely on their savings interest to top up their pension and pay everyday bills. For some pensioners, their main source of income comes from savings. Thus, the over-sixties will be worst hit by the collapse in the base rate. Hence, it's vital that pensioners (and all savers) shop around to find a first-class rate of interest on their nest egg, otherwise their cash will start to crumble.

To me, this demonstrates everything that has gone wrong during the huge borrowing and housing binge which began when Gordon Brown became Chancellor in 1997. Since then, personal debt has tripled and the savings ratio has fallen to a near fifty-year low. Crikey!

A mixed blessing

As a saver with neither interest-bearing debts nor mortgage, these rate cuts hit me in the wallet. However, I can understand the thinking behind them, as UK borrowing far outweighs our savings. We consumers owe close to £1,500 billion in mortgages and other debts. However, our savings are about £400 billion less, at £1,100 billion.

Thus, in theory at least, cutting interest rates should make us better off as a whole. However, banks and building societies need to rebuild their battered balance sheets, so they are passing on rate cuts in full to savers, while only dropping rates modestly for borrowers. This increases their `net interest margin', enabling them to boost their profits and strengthen their capital position.

Lastly, if this news leaves you feeling optimistic, then think again. The UK is in the grip of the worst financial crisis since World War Two -- and it's not over yet. In the past four months, our currency has collapsed against the euro and the US dollar, making exports cheaper but imports more expensive. As interest rates head towards zero, this could cause sterling to fall further.

Although the government's biggest worry at present is deflation -- falling prices -- rising import costs would lead to a rise in inflation. This would worsen if the Treasury decided to implement `quantitative easing' -- printing more money in order to pump up spending. In the next five years, our national debt could triple, forcing future governments to raise taxes. Thus, in the near future, the UK could once again resemble the `sick man of Europe' in the eyes of the rest of the world...

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