Interest rates cut to 2%
The Bank of England has cut interest rates by 100 basis points today to 2%, the lowest level for more than half a century.
The central bank’s Monetary Policy Committee (MPC) has shaved 3% off interest rates since October, and experts predict rates will fall even further in the new year.
Although the UK will now enter 2009 with interest rates at just 2%, the extent to which consumers benefit remains to be seen.
According to data provider Moneyfacts, 75% of mortgage lenders failed to pass November’s 1.5% cut on in full to standard variable rate borrowers. However, 92% of saving providers slashed rates by 1.5% or more in light of the 150 basis point reduction.
Michelle Slade, analyst at Moneyfacts.co.uk, says: “Both borrowers and savers have been penalised following the last base rate cut.”
Lloyds TSB and Cheltenham & Gloucester have already promised to pass on December's base rate cut in full to SVR borrowers as well as tracker customers.
The banks, which are part of the same group, say they will also cut rates on new tracker products "as soon as possible".
Meanwhile, the latest house price date from Halifax shows property price have fallen by nearly 15% since November last year bringing the average value back to levels not seen since July 2005.
Martin Ellis, chief economist at Halifax, says: "The combination of high house prices in relation to earnings, constraints on householders' incomes and spending power and the decline in the availability of mortgage finance since the summer of 2007 has curbed housing demand. These factors are major contributors to lower house prices and activity.”
However, Ellis says there are signs that pressure on incomes are beginning to ease as inflation falls back down from its September high of 5.2%.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.