The Bank of England has slashed its base rate to 2%, matching the lowest level in its 314-year history. This is good news for borrowers, but bad for savers.
At noon today, the Monetary Policy Committee (MPC) of the Bank of England slashed the Bank's base rate by a full percentage point to 2% a year. The MPC has cut the base rate three times this quarter, as the following table shows:
Date | Rate cut (%) |
|---|---|
4 December | 1.0 |
6 November | 1.5 |
8 October | 0.5 |
Total | 3.0 |
An historic low
As you can see, the base rate has fallen by three percentage points in three months, falling from 5% to 2%. The last time the base rate was this low was in 1951, when Sir Winston Churchill was prime minister. Indeed, the Bank's base rate has never gone below 2% since it was founded in 1694, during the reign of William and Mary. (For the record, the first-ever Bank rate was set at 6% a year.)
Clearly, the MPC believes that only dramatic -- even desperate -- rate cuts can save the UK from a prolonged and deep recession.
The pound takes a pounding
However, lower interest rates make the pound less attractive to foreign investors, which is why it fell to a record low against the euro -- and a seven-year low against the US dollar -- this morning. Although this is good news for British exporters, it's bad for importers, as the cost of goods coming into the UK will climb.
Good news for half of all mortgage borrowers
Around half (50%) of all mortgage borrowers have a fixed-rate loan, so they will not benefit from reductions in the base rate. Borrowers that do benefit include those with tracker mortgages (which track the base rate up and down) and variable-rate mortgages, most of which are linked to banks' standard variable rates.
Borrowers with a £100,000 interest-only home loan will see their yearly mortgage bill drop by £1,000, or over £83 a month. For repayment mortgages, the calculation is more complicated, because the saving depends on the starting rate and the length of the loan. For example, a rate cut from 4% to 3% on a £100,000 mortgage will save £658 a year (almost £55 a month) on a 25-year repayment mortgage. Use our mortgage calculator to work out how much you could save.
Then again, these calculations assume that mortgage lenders will pass on the full percentage-point cut. Given the horrendous state of our banks, I expect several to boost their profits by only passing on a proportion of the fall. In particular, I'll be watching big banks Barclays and HSBC, both of which have avoided state bailouts and failed to pass on the previous 1.5% cut in full.
On the other hand, I expect the nationalised and part-nationalised banks (Bradford & Bingley, HBOS/Lloyds TSB, Northern Rock and Royal Bank of Scotland) to pass on the rate cut in full. After all, having had tens of billions of taxpayers' cash, they now have the Government as a major or 100% shareholder!
Some relief for businesses and other borrowers
Businesses will also benefit from lower rates, in part thanks to a warning from the Treasury to the banks to treat businesses fairly.
Alas, a lower base rate is unlikely to have much effect on the interest charged by credit cards, store cards and current-account overdrafts. Indeed, these forms of unsecured (non-mortgage) borrowing are barely affected by general interest rates elsewhere. For example, a typical credit card charges an annual percentage rate (APR) of 17.2%, as I warned in The Curse Of The Credit-Card Crunch!
Bad news for savers and pensioners
Sadly, another base-rate cut means more misery for pensioners and other people who rely on savings interest to supplement their income. The downside of these recessionary rate cuts is that the most prudent people -- British savers -- are being hit hard by lower returns. In effect, thrifty and sensible savers are being punished by reckless lenders, borrowers and over-spenders.
Hence, my advice would be to find a table-topping savings account now -- and lock in your money before savings rates fall even further...
More cuts to come?
Finally, if economic conditions continue to worsen, then the MPC will go even further, perhaps even cutting the base rate to zero or just above it. However, this would poleaxe the pound, send the cost of imports soaring, and cause inflation to begin rising again. Clearly, the MPC -- and the UK economy itself -- is caught between a rock and a hard place.
PS: Unfortunately, homeowners' worries are far from over. Halifax reported that its House Price Index fell another 2.6% in November. It is now down a whopping 16.1% in the past twelve months. Also, the Council of Mortgage Lenders has predicted that there will be 75,000 home repossessions next year -- close to the record of 75,540 set in the dark days of 1991. Ouch.
More: Find first-rate savings accounts and magnificent mortgages | Savings Providers Slash Rates | Beware Of This Tracker Mortgage Trick