Rates Cut - But to Whose Advantage?
8 January 2009
The Bank of England today dropped interest rates to 1.5 per cent, taking rates into territories as yet unchartered during the BoE's 315-year history. Fierce speculation had preceded the midday announcement, with the retail sector demanding a full one per cent cut, and experts squabbling over what reduction, if any, should be introduced.
To their credit, the Nationwide, Lloyds TSB, C&G and HSBC immediately announced full 0.5 per cent reductions in their Standard Variable Rate mortgages, to take effect from March 1st. However, few other banks are likely to be as generous. Some, such as the Alliance & Leicester, have failed to pass on either of the last two cuts in full, and there is relatively little indication that today's announcement will be good news for anyone other than people on tracker mortgages, as opposed to SVR or fixed rate deals. At the same time, the nation's savers (particularly millions of elderly people who top-up pension income with interest from savings) are suffering badly, with a third of savings accounts now effectively generating no interest at all. A growing chorus of protest is suggesting that the BoE's interest rate cuts are punishing the prudent to benefit the financially feckless.
However, there is another increasingly populist school of thought that the Bank of England's interest rate decisions are now largely irrelevant. The economy continues to struggle, as evidenced by the continuing swathe of administration proceedings and job cuts, but while savers lose out, many borrowers are not seeing the expected falls in their monthly expenditure. With the SVR of many banks standing at almost four times the new BoE base rate, an almost complete dislocation has taken place between headline interest rates and those set by the nation's banks and building societies.
The banks themselves are caught between demands to maintain savings rates and lower borrowing charges, as well as facing the incompatible Government demands to lend more money while bolstering their own savings. Until 2001, there was roughly a 1:1 ratio between bank lending and savings - today, that ratio stands at around 7:1. The run on Northern Rock was fuelled by consumer fear that the bank simply didn't have enough money to pay out to account holders due to its spiralling debts. Much the same fear lay behind the collapse of Iceland's three major banks last autumn.