Interest Rate Cut

By Ben Yearsley | 05 Dec, 2008 

In a move that was widely anticipated, the Bank of England Monetary Policy Committee cut the base rate in the UK from 3% to 2% yesterday (4th December). This follows on from the 1.5% cut in November leaving rates at their lowest level in the UK since 1951.

This cut should be good news for those with borrowings linked to a variable rate as banks and building societies should pass at least some of the cut on, indeed some banks have already indicated they will do so.

The stock market barely reacted to the news with the FTSE closing broadly level yesterday as the cut was anticipated - much economic data over the last few weeks has been particularly gloomy. The reaction of the market suggests that this will not be the last cut and it is entirely probable in the New Year we will see a further 0.5% or maybe even 1% knocked off rates.  Unfortunately, until the banks have the liquidity to lend again it is unlikely that interest rate cuts alone will do the trick to pull the economy out of recession.

The bandwagon to force banks to cut rates is growing; however I do find this slightly perplexing. It is in the interests of everyone to have a strong banking sector. Banks are currently trying to rebuild their businesses after a decade of excess built on the back of non profitable mortgage lending. Secondly, there are many in this country who rely on the interest from their savings to live on – yet again these savers are being penalised by large rate cuts. If you are a saver however, there are still some fixed rate deals in excess of 4%. Maybe it’s time to lock into these rates with cash that you don’t need immediate access to as it will be a while before they creep up again.