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New 1% loan rate is lowest in history
Jonathan Prynn, Consumer Affairs Editor05.02.09
- Commentary: We need this cut, even if it hurts more
- Savings account rates set to fall below one per cent
- Recession watch: More shops set to drop as freeze takes toll
- Bailed-out bankers facing new curbs
- Senate softens ‘Buy American’ bill
- Buoyant Abbey bucks the trend of despair
- The great High Street fire sale but will there actually be any takers?
The Bank of England today slashed its interest rate to an all-time low of one per cent.
The fifth consecutive cut in the official cost of borrowing came as the Bank warned of a “severe and synchronised downturn” in the world economy.
The 0.5 per cent cut will help about four million borrowers — including 600,000 in London — on tracker mortgages that automatically fall or rise in line with the Bank's rate.
Up to two million more on variable rate deals will also see a reduction in their monthly bills as major lenders such as Halifax and Nationwide said they would pass on the cut in full.
In total, around half of all mortgage holders should see some benefit.
However, there was anger from savers who said the latest move was the “final nail in the coffin” for people who rely on income from their nest-eggs. On another front, controversy was raging over moves to give bonuses to bankers who contributed to the financial meltdown.
The new one per cent rate is the lowest in the Bank's 315-year history and has plummeted from five per cent since October.
The Bank hopes that lower borrowing costs will help bring an end to the worst recession in 28 years by encouraging businesses to invest, consumers to spend and first-time buyers to goback into the property market.
For around 1,500 borrowers with Cheltenham & Gloucester who have tracker deals at 1.01 per cent below the base rate, their interest bill is now effectively zero.
C&G said its computers could not cope with a zero interest rate and borrowers would be charged 0.001 per cent, or 8p a month for a £100,000 home loan.
Borrowers on variable rates with major lenders including Halifax, Nationwide, and Lloyds will also get the benefit passed on in full.
But borrowers with other lenders on variable rates are likely to get only part of the benefit. Anxious savers were waiting to see how far rates on their accounts would be cut.
Before today the average rate on instant access savings accounts was 1.07 per cent but this is now likely to fall to about 0.6 per cent.
Independent financial adviser Simon Hodge said: “For savers, and pensioners in particular, this latest cut in the base rate is another major blow. While the banks may not pass on the reduction to borrowers, it's a safe bet they will pass it on to the beleaguered saver.
“In extreme cases, this could result in accounts paying zero interest, and where these accounts charge a monthly fee they could, in theory, generate a negative return.”
Louise Bond, Personal Finance Manager at comparison website uSwitch.com said: “Today's base rate reduction could be described as the final nail in the coffin for savers.
“This means that people with the average savings balance of just under £3,000 will get less than £10 a year in interest — a minimal return.”
But some City economists said the Bank had no choice but to cut rates again. Stuart Porteous, head of RBS group economics, said: “Putting a floor under the fragile economy remains priority number one. The UK's eight million net savers will have to play second fiddle for now.
“The Bank is quickly running out of wriggle room on rates. Other weapons in the Bank's arsenal are now being readied for the offensive — buying assets first, printing money second.”
ING Bank economist James Knightley said rates could fall even lower, to 0.5 per cent, in the months ahead.
Other experts were sceptical about whether the today's cut would do anything to stimulate the economy.
Andrew Hagger of financial website Moneynet.co.uk said: “You really have to question if there is any point in pursuing this panic driven, rate-slashing strategy, as apart from the fortunate minority on a base rate tracker mortgage, everyone else, whether they are a saver or borrower, is getting a poorer deal.” However, property experts said the rate-cutting may produce the first green shoots in the property market for 18 months.
Peter Rollings managing director of estate agent Marsh & Parsons, said: “We've already seen the impact of the Bank's last cut — Marsh & Parsons registered more than 1,000 new buyers in January alone. Renters are demanding six-month break clauses in their leases so they can get out quickly to buy at the floor of the market — the number of buyers with secure mortgage finance was noticeably higher last month.”
Reader views (25)
there is no relationship between the base rate, the cost of funding for a bank, and the rate of interest charged on a credit card. there just isn't.
an interest paid on savings is no more than compensation for not spending, and it is to be seen as the increment above inflation as the net yield.
so the compensation is reduced as the economics of the matter are such that the spending is needed to stimulate the economy; and as inflation is falling, that is a net positive return for savings that no one here seems to understand.
with inflation at 4% and interest rates at 5% - there is net +/ve return of 1%. not 5%
- Scott, London
Great.....so, can't afford to get a mortgage....so what would once have been a good deposit is now held up in savings....which will soon be worth nothing. And people wonder why we have no sympathy for the 'poor' mortgage holders. Be grateful you have one!
- Annie, London, UK
Now sort out the credit card crooks who have not reduced their rates.
- Mr S.Port, London
Well isn't this great! What about the people that have made different choices and saved? If I was now 65 and reliant upon savings I built up over 30 years I would be very annoyed that I am being affected by the actions of an industry that has often put itself above others and the decisions of the BoE to further reduce the ROI.
I also agree with another commenter here, why are the credit card companies not forced to lower their rates as they themselves can now borrow much more cheaply. I have not heard any commentators on this in the press or on the BBC where many programmes have been recently created to examine the current financial situation and the consequences.
- Cel, Wrexham, Wales
Wonder what would happen if ALL SAVERS who are not on fixed rate savings withdrew their money as a form of Savers Strike? Afterall one might as well buy premium bonds until rates recover!
- Melvyn Windebank, Canvey Island, Essex
When is there going to be a day of reckoning? Let's identify those who have brought good honest people to the verge of despair by reckless investments with loaned money. Bankers. Many people like myself have never borrowed more than we could repay and have saved prudently with a view to having a little bit extra. Now because of the imprudent actions of those trusted to do better the last years of countless people will be blighted. I'm not prepared to sit back and do nothing. All I can do is march on like a good Christian soldier and lay siege to those managers who have ruined what is left of my life. Identify those managers at whatever level. They should not be allowed to get away scot free, let alone go on to enjoy fat bonuses. It has become a shambolic mess brought about by so called 'experts' who are nothing short of greedy, grabbing unethical shysters.
- Cyrjames, Berwick-Upon-Tweed, UK.
The public should now DEMAND that credit card companies levy a realistic rate! Many advertisers on TV are also still charging excessive rates of interest. WHY?
- Burton J Helling, LE HOMMET D'ARTHENAY, FRANCE
With the interest rates having fallen to 1%, why are the interest rates for credit cards are still kept at 24%? Barclaycard has stealthily raised the interest rates from 16% to 24% during the boom period, and I am still paying this rate. I am very tempted to simply declare myself bankrupt and come out of this unfair system of rip-off rates.
Why does not the government nationalise the whole banking system? It has bailed the banks out twice. By all accounts, the banks are now existing on taxpayer's money. Since it is happening anyway, the taxpayer is the one who should own the banks. This may be the way to boost the economy and get the banks to start lending money to the people who pay for them to stay open in the first place.
- Galina St George, London, UK
are we in total free fall?
is this the end of civilization as we know it?
has capitalism popped its clogs?
what do they know that we don't?
in the entire history of interest rates nobody has ever
before gone this far; we can but quake in our boots.
- M.O;Brien, london.uk
What is perverse is that the people who took life seriously and did not indulge in excessive borrowing but saved (to the benefit of those who borrowed) are being penalised for being prudent. Another perversion is that Brown, the so called Prime Minister is able to assist the change of emphasis from his stance as prudent. His hypocrosy is staggering. Coming from the Calvanist culture and the reputation of Scottish prudency (no longer will Scots be ever favoured with this reputation that at one time I actually believed - RBS!) he is a busted flush and should be replaced quickly or we may be heading for even worse.
- John, EPSOM
they are destroying the savings of the prudent to prop up property speculators and those that have borrowed way beyond their means,some fraudulently. totally immoral and doomed to fail!!.
- Daniel Powell, United Kingdom
So the BoE cuts interest rates, while the banks and building societies are currently sending their customers notice that they are putting up the APRs attached to all credit cards!
- Diana, London
This Irresponsible Government has succeeded in deterring a future generation from saving ..
- Pete, Aberdeen
They must want everyone to keep borrowing and spending. Where is it all going to end.
- Mike, Stanmore
Don't the Govt/Bank of England have any idea at all of economics? Cutting and cutting rates can only lead to inflation-serious inflation-as imports of essentials and luxuries alike increase in price as the pound collapses, meaning higher costs for everyone; the present policy, though, is largely based on re-stoking house prices, as if the property owning sector is the only thing that matters. One can only assume that this Government WANTS to cause inflation in order to wipe out its debt.
- Jon Kent, Hertford. UK
My mortgage is still at 4.5%
- E Sullivan, London
JC, sorry to disappoint you but have you thought that part of the point of rate cuts is to encourage people to spend?
which incidentally is the point, you are not doing the right thing by saving - that's what they are trying to encourage you NOT to do.
that you see the disincentive to save is a good thing, this is the message you should be receiving.
- Scott, London
This latest cut is more self-flagellation from the BoE. Nothing will change until the Government cuts its bloated spending and then cuts our taxes so that we, individually, can control our own budgets. The UK budget is beyond Brown and Darling's control. Socialism has failed. R.I.P.
- Tommy Bradley, London, UK
Brilliant. There go my parents' pension and my savings. Fab.
- Flo, Bath
It's a silly thing to discourage savers when the banks are short of money to lend.
Also, inflation may not fall as low as they think - Devaluation of the pound is steadily pushing prices up - look at the increasing cost of food, fuel and petrol, largely because we buy these from abroad
- M Wood, somerset uk
the problem with quantitative easing is that it will certainly increase inflation.
the good thing about that is inflation is guaranteed to resolve the debt issue. however, can the genie be put back in the bottle?
- Scott, London
What is the point? The banks/building societies won't pass it on to borrowers, but everyone doing the right thing and trying to save will be worse off.
I thought these people were supposed to be intelligent.
- Jc, london
Rather irnonic then that todays Halifax house price index shows that prices are up over 1%.
- Bob, Cheam
A scam perpetrated by the government so that they can borrow money at a rate they have fixed in the guise of Ernie, National Savings certificates and gilt offerings.
Who does this penalise? Well, savers and pensioners with assets and those who want an annuity.
Who benefits? The government in the form of what they are borrowing from the investors and encouraging them to borrow more money; borrowers who over borrowed, but then the lenders do not reduce their rates.
The government does not reduce the level of interest they charge on unpaid taxes, nor do lenders to businesses.
The reduction does not make commercial sense, so clearly the BoE is not independent, but dancing to the tune of Brown/Darling, the former of which dug us into this hole.
- Hugh, Middx
But my OAP Dad's utility bill has just gone up 150 quid. Bum deal for some, huh?
- Roz, Chamonix, France
