Bank of England announced a cut in base rate to 5% today. Moneysupermarket editor Clare Francis looks closer at the decision along with savings expert Kevin Mountford and mortgage expert Louise Cuming...
Video Transcript
Clare Francis: The Bank of England's Monetary Policy Committee voted to cut interest rates from 5.25% to 5% today. This is the third quarter-point reduction since December and it's a clear sign that the Bank now views the worsening credit crisis as a more severe threat to the economy than rising inflation.
Things have changed significantly since February when Mervyn King, the Bank of England's Governor, warned consumers not to expect significant interest rate falls this year because of inflationary pressures. However, since then it has become clear that the credit crunch is more severe than anyone expected.
Interest rate cuts are usually bad news for savers, but good news for borrowers, however because of the credit crisis and the impact it's having on financial institutions, experts are warning that may not be the case this time around because of the extraordinary circumstances we currently find ourselves in.
So while financial institutions might welcome today's rate cut, borrowers are being warned not to expect lower mortgage rates.
Louise Cuming: The fact that the MPC have put the base rate down means that those of you on Tracker Rate mortgages, and that's the majority of borrowers at the moment, will have a guaranteed reduction in your mortgage payment.
The news probably won't be as positive for those of you on Standard Variable Rate (SVR) - last time there was a rate reduction, 20% of lenders didn't pass the full rate reduction on, and we're expecting that percentage to be even greater this time. So the message is, if you're on SVR, shop around - you can probably find a better deal.
Clare Francis: While borrowers can't bank on lower mortgage rates, savers may still find that they're able to take advantage of some highly competitive deals even though interest rates have fallen.
Kevin Mountford: I think that the fact that the base rate has gone down now isn't necessarily a surprise, there was always a debate whether it will stay the same because of inflationary pressures, or it would go down because of just the economic environment.
So in terms of providers I guess they will start to pass this on at some stage, but as we've often said, savings rates at the moment are artificially inflated because banks and building societies can't get enough retail inflow, i.e. savings from consumers. So I don't expect that situation to change, but as always I would check your account and your provider, to make sure that if they do start passing these rates on too quickly, there's always alternatives in the market, a very competitive environment.
I guess the other thing to consider now is, if we are in a 'rate-reduction environment', you should be looking at some fixed-term products, but I still feel that rates over and above 6% are going to be available for some time.
Clare Francis: And today's interest rate cut may not be the last - because of worsening economic conditions, some economists think that Bank rate may fall to 4.25% by the end of the year.
