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Clare Francis: Economists have been calling on the Bank of England to take decisive action against the looming recession and we've now seen interest rates slashed for the second month in a row with the Bank's Monetary Policy Committee voting to cut interest rates 4.5% to 3%, and interest rates have fallen from 5% back in September. Analysts are warning that further rate cuts are on the horizon as the MPC aims to stave off a prolonged depression, and we may even see the base rate fall below 3%.
But the fallout from last month's cuts suggests that both savers and borrowers may lose out in this current round of rate reductions. Louise Cuming, who's a mortgage expert and Kevin Mountford, who's head of savings here at moneysupermarket.com, are here to explain why.
Q1: Obviously interest rate reductions are usually bad news for savers, but they should be good news for borrowers because mortgage payments should come down, but Louise that's not necessarily going to happen is it? Can you just explain why?
Louise Cuming: Well if you look at the mortgage market, initially what happens is lenders usually pass on the rate reduction through their standard variable rate. Now a month ago we saw a half a percent reduction and we have still got 35% of lenders who haven't decided what to do so there's 33 lenders who have yet to decide whether to pass that cut on or not and actually 37.5% of lenders have passed on less then the full cut. So that indicates A) the cut won't be passed on in full, and B) that those lenders who have yet to decide may well wrap two rate reductions up into one, and their borrowers will lose out.
CF: And obviously its borrowers on a standard variable rate and discounted mortgages that are affected by that?
LC: Absolutely.
Q2: But while they're losing out most savers have felt the full brunt of the rate cut, haven't they?
KM: Yes, I mean we have reported now for a while that savings rates have been artificially inflated. There is such a demand for retail savings - savers deposits - that there has basically been a lot of competition and I think what we have seen over recent weeks with the savings crisis - post what happened with the Icelandic banks - that consumers are looking first and foremost for security, and I do think that the market is taking this opportunity to maybe realign customer rates and the last rate reduction we saw, there's a number of providers who have actually passed on that full half-percent.
CF: And some have gone by even more...
KM: Well they have, and as I say their margins will have been under pressure as a consequence of these inflated prices, and I think now there is an opportunity for the main players to bring these back online. So I would expect further cuts on the back of the latest announcement.
Q3: Do you think that we're going to see this discrepancy continue so that savers perhaps feel the full brunt of rate cuts and possibly even more, whilst borrowers are sort of short-changed in the way that lenders aren't going to pass on the full reductions?
KM: Well, I would put it in simplistic terms, this is the way banks can manipulate margin on the back of rate changes, and there is two elements to it - the savers and the borrowers - and I think unless they are working in tandem they're always going to maximise the opportunity, and I just see that short term that's exactly what they are going to do.
LC: I'd completely agree with Kevin, I think really what all the lenders are looking for at the moment is profitability and any opportunity to increase their margins they are going to take it. In a lower rate environment then margins are squeezed anyway, so they are going to take every opportunity to get that bottom line back where they want it to be.
Q4: So what's your advice then for consumers, if we start with borrowers, because obviously should you be going for a discounted rate if you are not necessarily going to get the benefit of a rate cut?
LC: Well from a borrowing perspective there is two angles: 1, if you are borrowing towards the maximum of your affordability and you just need that peace of mind I still say look at fixed rates, because then you have got some certainty. If you're not as bothered with the fact rates may alter, then I would always countenance tracker rates because they are so transparent. Once you have got a tracker rate, whatever happens to the Bank of England base rate will automatically be passed on to you.
CF: But some lenders do impose what they call 'collars' don't they...
LC: Now that is a very, very good point - some tracker rates have a proviso that they will not fall below, on the main, 3%, so if the rates come below that you wouldn't benefit from that, so again its always very important to look at the detail of the product your getting involved with.
Q5: And what about savers, because we have obviously still got high inflation even though interest rates are coming down so it's getting harder to actually make a positive return on your money. What your advice for savers?
KM: I guess what we are seeing is a belief that inflation has peaked now, the big issue is that base rates will come down faster then inflation does, so there is going to be a disconnect there. I think the advice to saver is don't get complacent, don't lose sight of the fact that you have got to spread the risk around, I mean even this week we have seen other mergers and acquisitions in the banking / building society sector, so I don't think all the skeletons are out of the cupboard of that one. So, spread your risk around but equally don't lose sight of the fact that you have got to get a maximum return on your investment so you've got to look at both aspects of saving.
CF: So you look for the highest rate and then make sure you are protected under the terms of the compensation scheme i.e. have no more then £50,000 with one institution?
KM: Correct.
Q6: There is a lot money sloshing around in the savings arena at the moment, because we have got all the money coming out for Icesave customers in the next few weeks, and their going to be looking for new homes. What about fixing your savings at the moment?
KM: Well first of all you say there is a lot of money sloshing around - it pretty much is existing savings, there is not a lot of new money coming in because people just can't afford to save, so it is churn.
But, you are right there is going to be something like - depending on which report you believe - 200,000, 300,000 savers that will hopefully got their money back on the back of the Icesave situation over the next couple of weeks. Most of these I guess are quite internet savvy and there is not the degree of direct products that there were several weeks ago, so it is important that you look around at the different options but make the right choice.
CF: Thank you very much.
KM & LC: Thank you.
