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Bank of England slashes interest rates to 2%
Jonathan Prynn and Sri Carmichael04.12.08
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- Frost and Ferguson hit as £3bn property fund collapses
- Brown pledges to help hard-hit homeowners
- Anne McElvoy: Does Gordon Brown need to be likeable to win the next election?
- Poll: Do you think mortgage scheme will protect you?
- Beckett doubt on how many homeowners will be helped
- Chris Blackhurst: Joy will be short-lived
Bank of England slashed interest rates again today to match their lowest level on record.
On another day of gruesome economic news it carved a full percentage point from its base rate, lowering it from three per cent to two.
The cost of borrowing was last at this level in November 1951 and has never been cheaper since the Bank was formed in 1694.
Gordon Brown said interest rates could fall further and did not rule out them dropping to zero. The Prime Minister added that all banks and building societies should lower their mortgage rates.
The cut will bring joy to up to 3.5 million homeowners on tracker mortgages that fall and rise in line with the Bank's base rate.
Borrowers with a typical £200,000 London mortgage will be around £113 better off each month when their new rates kick in on 1 January. However, about 600,000 with "collars" in their mortgage small print, including borrowers with Nationwide, will lose out because their rate is now frozen.
But the Halifax said it would not saddle its borrowers with a collar at three per cent, despite its own small print saying it had a right to do so.
Another 2.4 million homeowners with mortgages on standard variable rates will have to wait to see if their lenders pass on any or all of the cut. So far only Lloyds TSB, its mortgage off-shoot Cheltenham & Gloucester. and HSBC have said they will definitely pass on the full saving.
In total it is estimated that up to 500,000 London homeowners will miss out on today's rate cut. The scale of it was in line with City forecasts, although some commentators had been calling for even more radical action.
In a statement the Bank of England's Monetary Policy Committee said it had acted because of growing evidence of the scale of the downturn - almost certain to be confirmed as outright recession next month - and because of the lack of credit in the economy.
The Prime Minister said mortgage lenders must now act to cut rates: "They have got responsibilities. Many of them have voluntarily announced already, even in the last few minutes, that they are putting ... their mortgage rates down. I think all of the others should follow suit."
He branded it "unacceptable" that lenders had not lowered their variable mortgage rates following earlier cuts in interest rates.
The MPC said it had concluded "it was unlikely that a normal volume of lending would be restored without further measures".
It came on another gloomy day for jobs with 7,000 workers being told they were being made redundant. There was also grim figures from the motor industry with car sales at their lowest for 28 years.
The European Central Bank also today cut the interest rate on the euro with a 0.75 per cent fall to 2.5 per cent. It was the biggest cut in the 10-year history of the currency.
Further cuts in Britain are expected. Commentator Roger Bootle, of Capital Economics, said: "The key point is that in order to prevent the recession from turning into a depression, the MPC needs to cut interest rates to levels never seen before. I continue to think that it won't be long before interest rates are reduced to one per cent, and they may ultimately have to fall all the way to zero." Mayor Boris Johnson told bankers at a City Hall summit this afternoon that it was their responsibility to "unfreeze the rivers of credit".
Peter Bolton King, chief executive of the National Association of Estate Agents, said: "This cut, in reality, won't do enough unless the banks play fair and pass it on to homeowners. We are, once again, calling on all of the major lenders to commit to passing these savings on to the consumer."
The latest cut, the sixth in the past year, also came on a day of dire figures from the property market showing that the fall in values was far worse than even the depths of the last recession.
Figures from Halifax showed that house prices fell 2.6 per cent last month, taking the annual drop to 16.1 per cent. The average price of a UK house is now almost back to where it stood in July 2005 at £163,605.
The big base rate cut was warmly welcomed by industry and high street businesses. Stephen Robertson, director general of the British Retail Consortium, said: "This is exactly the type of decisive action we need during these uncertain times. Decisions now will greatly influence how long and deep the recession is."
TUC General Secretary Brendan Barber said: "This decision was spot on. The Bank of England could not be clearer about what it expects the high street banks to do."
Reader views (21)
Too little, too late. This should have been done 6-9 months ago to stimulate growth and stave off even bigger job cuts which are just arond the corner for many (not just banking). Its going to take 18 months minimum @ 1% or lower interest rates to stimulate growth now. Every day now the bad news is escalating rapidly. Once the banking system pumps the brakes suddenly, accelerating again is not just a matter of pushing a button. We will be very lucky if this downturn lasts less than 1.5-2 years. Prepare for that duration as best you can then if it recovers sooner you will be far better placed to prosper from it.
- P, London, England
BJ, London 1951 and a Labour governments is replaced by a tory governments which was still led by Winston Churchill anyone remember how long it was before interest rates went up and by how much?
Its a pity that the government does not take advantage of low interest rates to set legal limits on how much above base rates interest on loans, credit cards etc. can be charged.
- Melvyn Windebank, Canvey Island, Essex
Great news Gordon. Keep it going and even the Tories will have to concede you know how to cure the credit crisis
- Keith Price, Luton, England
Enough is enough and this is more than ENOUGH to start anothe run on the pound.
- Bernard Parke, GUILDFORD
Cap, I thought the reduction in interest rates was to stimulate the economy.
- Steven, London
A significant number of pensioners relying on interest on cash deposit savings to supplement their pensions will have suffered a huge drop in their income from this source. They will therefore be spending far less on the high street - thus contributing further to the UK's economic woes and possibily creating a whole extra group of people asking for state help through the benefits system.
- Raymond, London
This will drive the pound lower, consequently everything imported- which is most of our foor and raw materials including oil and petrol - will rise in price. Inflation by the back door.
And making our exports cheaper doesn't help - no country has the cash to buy other than absolute essentials!
- David Chown, bordeaux ex-pat
Yes, quite right. Nationalise all the banks.
- Susanne, Buckinghamshire
Savers hit in the pocket whilst the profligate borrowers whinge and whine about the debt THEY decided to take out.
If the Savers Interest rate reduces any firther, look forward to have no capital in any Bank or Building Society.
- Cap, london
How can the banks justify personal loan rates at more than 4 times the BOE interest rate and almost twice the LIBOR rate? The banking industry should hang it's head in shame for creating the world's worst economic crisis.
- Patrick Hanson, Sunderland, UK
The cut in interest rates was never intended to benefit the ordinary hard pressed tax paying, mortgage paying member of the general population. It is just to stimulate inter-bank lending.
The banking system is a FRAUD. It has been for the best part of 300 years, ever since banks were legally granted the right to lend up to TEN times the amount of money they had on deposited. Thus, each and every one of us invests our hard earned cash with a bank. The bank then retains ten percent in reserve and lends the rest at high interest. The 'loan' is merely entered on the ledger and the borrower pays back over time. The borrower goes and deposits his loan money in another bank which in turn lends out ten times the value and so on. If the borrower defaults, the bank then forecloses by confiscating REAL wealth/value in the form of property and goods in payment of the 'debt'.
The system relies on our collective 'trust' in the system, simply because if there was no trust and more than ten percent of depositors attempted to withdraw simultaneously it would collapse like a house of cards. That is what is happening now. It is a GOOD thing, a liberation from slavery in the long term.
I am not 'having a go' at ordinary people who work in the banking sector but I think most people never focus on the 'big picture'.
Now think of the 'national debt' to the banksters in global terms and why it is that politicians don't dance to 'our tune' but somebody elses!
- David Moon, Seaford, UK
Ah 1951, a labour government and rationing.
- Bj, London
As I am an Expatriate of the United Kingdom and questions or invites to comment on these matters or subject may not be of immediate concern, but it seems to me that all sections of the community in he UK have been served with something which could be described very good in the circumstances. It is unfortunate that you and, perhaps, we have questions from reporters and BBC News presenters of a tabuloid nature, which enourages despondency.
- Arthur Lincoln, arthur.lincoln@skynet.be
I am pleased to see that the BoE has cut interest rates again. However unless the lenders pass this cut on to the mortgage customers all this does is make a good headline. Further more given that 40% (rough esitimate) of the people who have a mortgages do so on a fixed term basis, they are not currently benefitting from the recent cuts. If the government were serious about getting the consumer to spend again they would not only force the banks to pass on the cut to variable mortgage customers, but they would also insist the banks pass this on to the fixed term mortgage. Maybe then we could all celebrate christmas in a much mood!!!
- Paul M, London, UK
It is greedy on the part of lenders not to pass on the cuts. They still make a sizeable profit from those mortgages that were fixed.
- Richard, London
So, apart from people with Tracker mortgages, is this going to benefit anyone else? Credit card companies and loan institutions are putting their rates up.
- Paul, London, UK
Carry on like this and they will be paying you to borrow money! - Can interest rates go negative?
But what will happen to those with savings perhaps they should withdraw thir savings en masse and buy premium bonds.
Well its a big contrast to when the tories made interest rates 18% and savers got 10% oh happy days..when Major walked (he also failed to hold a general election when Lady Thatcher was forced out) but just like Official Secrets its one law for them and another for the rest of us.
- Melvyn Windebank, Canvey Island, Essex
All this means is that the banks will restrict lending even further. They have to recoup their losses and with a 2% interest rate that is going to be difficult. This will achieve nothing, house prices will still come down and the pound will devalue even more
- Louise, london
time to stop giving any money to the banks etc.
nationalise all banks and energy companies.
sack all directors and upper managers of the same and put some people in charge that care about the common man.
- Tony Gray, sussex
If you are on the svr try another mutual. My mutual's rate is 5.3% and they have no arrangement fee or admin fee.
- Bb, S.E London
my so called mutual building society has just passed on a derisory 0.30 % drop of their svr to 6.94%.So much for mutuals acting in the best interests of all their customers as they have no shareholders as they so often state.This is a disgrace and frankly having committed financial suicide themselves they seem hellbent on taking all of us into the abyss with them.Nationalise the lot of them---they have had their chance to behave.
- Stephen Cole, London UK
