As such interest rates have been slashed from 5% to 2% since October and economists are warning that we could see Bank rate fall to zero in the coming months.
This should be great news for those with variable rate mortgages but life is becoming increasingly difficult for savers. For more, watch our latest video blog.
The bigger picture
The Government is desperate for consumers to start spending again to help kick-start the economy and with savings rates so low, there may seem little incentive to put money away at the present time.
However, with the country in recession and many people worried about job security, demand for savings products is expected to remain strong, despite the fact rates are unattractive, as individuals try to improve their financial position just in case the worst happens.
The outlook for the economy therefore remains quite gloomy and it is not being helped by the ongoing shortage of new mortgages.
While lower mortgage rates are benefiting existing homeowners with variable rate deals, those wanting to get on to the housing ladder are still struggling to find finance.
There is little choice for those with deposits of less than 25% and the director general of the Council of Mortgage Lenders Michael Coogan said last week that net mortgage lending in 2009 could be weaker than in 2008, as lenders continue to ration mortgages.
Unless the mortgage market opens up again, the prognosis for the housing market remains poor - if would-be buyers can't get finance further price falls seem inevitable.
How have institutions responded to the recent rate reductions?
The focus is on mortgage rates with the Government piling on the pressure for banks and building societies to pass on rate cuts in full to borrowers.
If this month's one percentage point reduction is passed on, someone with a £150,000 25-year repayment mortgage will see their monthly payments fall by £86.
Some of the biggest lenders including Lloyds TSB, which owns Cheltenham & Gloucester, Woolwich, Barclays' mortgage arm, and HSBC have pledged to reduce their standard variable rates (SVR) by the full 1%. However, despite Government pressure, not all lenders will pass the rate cut on in full. Halifax, the country's largest lender, has already said its SVR will fall by just 0.25 percentage points.
Last month, when Bank rate was slashed by 1.5 points, only 20% of mortgage providers passed on the full cut. And in October, two dozen lenders, including HSBC, failed to reduce their SVRs at all.
What about tracker mortgages?
This latest decision is another piece of great news for those with mortgages that track the Bank rate as they should automatically see their rate fall by 1% from next month.
However, perhaps surprisingly, some borrowers may find themselves short-changed. This is because a number of lenders reserve the right to impose what is known as a collar on their tracker deals. This means that if Bank rate falls below a certain level, in many cases 3%, the lender does not have to pass on the reduction to its tracker loans.
That said, Halifax and Nationwide have both announced that they will not be implementing their collars, so customers with trackers will benefit in full from this month's rate cut.
However, it's not such good news for those looking for a mortgage at the moment. With further interest rate cuts possible, trackers are expected to be a popular choice among borrowers, but lenders are pulling their tracker deals left right and centre.
Abbey, Alliance & Leicester and Royal Bank of Scotland/Natwest have all withdrawn their trackers following the latest rate cut. When they launch new tracker ranges, the rates will probably have wider margins in relation to Bank rate, meaning less competitive rates for new customers.
Savers suffer
Worst affected by the rate cut will be savers who have already been walloped by plummeting savings rates over the last two months. They will no doubt see further cuts in the coming weeks.
Most providers are unlikely to show their hands until the end of the month, but the rates on the majority of easy access accounts are likely to fall by the full one percentage point.
With further interest rate cuts in the offing, it could be a good opportunity to fix your savings rate if you have money you can afford to lock away. There are still some fixed rate savings accounts on offer over 5%. Both ICICI Bank and Anglo Irish Bank have one-year deals fixed at 5.75%. ICICI requires a £1,000 deposit while Anglo Irish Bank only asks for a minimum of £500. However, these products could be pulled at any time so you need to act quickly if you want to take advantage of one of these deals.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.
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