Following The Monetary Policy Committee’s decision to reduce the Bank of England Base rate by 0.25% to 5.00%, Defaqto’s Principal Consultant – Banking, David Black comments:
“This 0.25% cut by the Monetary Policy Committee was widely anticipated and comes as no surprise. What remains to be seen is how much each individual lender will pass on of this cut to its variable rate borrowers.
“Prior to this cut the average Standard Variable Rate was 7.21%. Last time the base rate was at 5.00% (between 9th November 2006 and 10th January 2007) the average Standard Variable Rate was 6.80%”
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Notes to Editors:
1 Dependent on the content of the release
For further information contact:
Defaqto Limited
David Black, Chris Johnston or Luci Mylward
01844 295 454
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On Thursday 10th April, the Bank of England’s Monetary Committee will set the Bank Base rate against an extremely difficult economic background. The Committee is charged with ensuring monetary stability and of keeping inflation within 1% of the 2% annual target level.
The fault lines in the economy are likely to make this month’s decision as difficult as it has ever been. Inflation, by whatever measure, is likely to show a rise in March under pressure from fuel and some food price increases, while house prices look as if they are coming down while mortgage rates are going up.
The reluctance that banks are showing to lend to each other is reflected in the LIBOR rate, which for 3 months, is just over 6%, which is 0.75% above base rate, compared with a typical spread of 0.25% to 0.50% above base rate for much of the first half of 2007.
It looks as if financial institutions are making their decisions about lending rates and lending decisions in the light of their own particular circumstances and are not being influenced too much by what may happen to the Bank of England base rate.
In the current economic conditions, trying to manage the economy by moving interest rates is looking increasing like a measure that has passed its sell by date. A cut in the rate will encourage inflation but is unlikely to influence mortgage rates and keeping the rate the same will just prolong the current status quo. A rise in the rate will potentially choke off even more demand and make the outlook for growth and jobs that much more dismal.
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The general concensus is that the Monetary Policy Committee won’t change the Bank of England Repo rate (base rate) in their meeting taking place this week. Expectations are that the rate is currently on a downward path although inflationary pressures may temper the MPC’s willingness to reduce further and faster.
There are clear economic worries too and suggestions that the US economy is in recession may lead to similar revelations over here in due course.
From a financial point of view the fallout from the US sub-prime credit crisis has meant that banks are generally unwilling to lend to each other and are finding it both more difficult and more expensive to raise wholesale funds.
This gives us an unusual situation.
If you’re a saver the best deposit rates are significantly out of kilter with the base rate. Ordinarily you’d expect to be doing well if you could find a savings rate that was equal to - or just below - the bank base rate. Now, however, you can beat the base rate by over 1% with certain cash ISAs or savings accounts. This is happening for two distinct reasons: firstly general eagerness to raise retail funds and secondly new entrants (typically foreign bank subsidiaries) who have to offer best buy status accounts to obtain sufficient customers through the resultant publicity.
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Following The Monetary Policy Committee’s decision to reduce the Bank of England Base rate by 0.25% to 5.25%, Defaqto’s Principal Consultant - Banking, David Black comments:”This 0.25% cut by the Monetary Policy Committee was widely anticipated and comes as no surprise. I will watch with interest to see whether the full cut is passed on to both savers and borrowers but I suspect that some providers may use the opportunity to widen their margins at customers’ expense.
“Prior to this cut the average Standard Variable Rate is currently 7.55%. Last time the bank base rate was at 5.25% (between 11th January and 9th May 2007) the average Standard Variable Rate was 7.05%.”
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For further information contact:
Defaqto Limited
David Black, Chris Johnston or Luci Mylward
01844 295 454
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