The base rate has now remained unchanged since March and many economists still believe it will remain at this level for the remainder of the year at least, due to ongoing uncertainty about the state of the economy.
In recent weeks, we’ve seen some positive data suggesting that the worst could be over and that the economy is beginning to come out of recession. And these glimmers of optimism are helping confidence. The FTSE 100 share index closed above 5,000 yesterday, its highest level for nearly a year, and Nationwide Building Society’s latest Consumer Confidence Index revealed a two-point increase in August.
Martin Gahbauer, Nationwide’s chief economist, said: "The moderate increase in confidence this month indicates that, for the first time since April, consumers are beginning to feel more positive, not only about the future, but also about the present situation."
However, economists are also quick to point out that it is still too early to call the end of the recession and, as such, the Bank of England is unlikely to change its current interest rate strategy for some time.
What does this mean for consumers?
One of the most interesting things about the current low interest rate environment, certainly as far as many consumers are concerned, is the impact it’s had on the savings and mortgage market.
As we investigate in our latest video, ‘What's happening to savings and mortgage rates?’, the effect has been very different and, in many ways, the opposite of what you’d expect to have happened. This also stems back to the root cause of the current problems – the Credit Crunch and the fact that there has been a mass shortage of funds available to banks and building societies on the wholesale markets.
While savers have seen their returns plummet as savings rates were slashed in response to the interest rate cuts at the end of last year and earlier this year, it’s not necessarily been all bad news.
With banks and building societies still desperate for our cash, the rates on savings accounts for new customers are much higher than the base rate and average savings rates. But if you are a saver, it’s down to you to take action and move your money to one of these accounts to take advantage of the great deals. If you don’t, you really will be feeling the full impact of this ultra-low interest rate environment.
Research we carried out a few months ago at moneysupermarket.com, found that the UK’s savers are missing out on around £7.7billion of interest because their money is languishing in a poor-paying account. The average instant access rate is paying just 0.15% according to Bank of England, yet you can earn more than 3.0% in the leading easy access accounts – Egg’s Savings Account is paying 3.25%, while ING Direct’s has a rate of 3.20%. And if you can afford to lock your money away, you can earn even more. ICICI’s two-year fixed rate HiSave account has a rate of 4.35% and Abbey’s two-year bond is paying 4.20%.
The ongoing shortage of funding, coupled with the weakness of the housing market and increased cautiousness of lenders, means that mortgage rates for new borrowers have not fallen in line with interest rate cuts.
Most existing borrowers with tracker mortgages are benefiting hugely from the fact base rate is just 0.5%, as their mortgage payments are significantly lower than they were this time a year ago. However, anyone on a fixed rate deal, or those looking for a new mortgage aren’t as fortunate.
HSBC has the lowest two-year discount at 1.99% but it is only available to those with a deposit of 40% or more. If you need to borrow a larger amount you’ll pay a much higher rate. The lowest rate for someone looking to borrow 90% of the property’s value is 3.89%. Again, this is a two-year discount from HSBC. The most competitive fixed rate at this level, is a two-year fix from Yorkshire Bank at 5.99%.
Therefore, the message for anyone needing a mortgage at the moment is to try and save as much of a deposit as possible.