interest rate cut again
Last month I commented on the Bank of England’s decision to cut interest rates to 1.5%, the lowest for more than 300 years.
Less than 30 days later, and the base rate has been slashed by a further 0.5 percentage points. Where’s the good news? Easy – if you still have a tracker mortgage you’ll save £41.66 per calendar month for every £100,000 of mortgage. If you’re one of the lucky few who feels the benefit of the rate cut on your SVR (standard variable rate) mortgage then good for you!
But there’s plenty bad news:
Primarily, it doesn’t address the problem of interbank lending (or lack of it) which is the fundaental reason that so few loans are being offered.
It does not encourage lenders to improve rates for borrowers more than 75% LTV (loan to value) as it will continue to harm their balance sheets as their debt repayments are at a much higher rate! In other words, most borrowers won’t notice any difference to their monthly payments.
Savers are penalised further still – those who rely on their savings and investments as a source of income are seeing a serious decline in personal wealth.
In turn, it’s harder for banks to attract funds (from savers) to fund further lending, creating a negative feedback loop.
Sucessive interest rate cuts are doing little or nothing to free up credit for the small businesses who really need it to avoid cutting their payroll and/or going under.
By continuing the period of artificially low rates the Treasury / Bank of England is risking long term inflation hikes while failing to provide the intended stimulus. In other words, continuing Government interference (including BoE reducing interest rates) is likely to exacerbate and prolong the recession rather than shorten it.
Sorry for such a negative post!
