Interest rates fall to 2%

The Bank of England's Monetary Policy Committee has again responded to calls from industry by voting to cut interest rates by one per cent, taking the Bank rate to 2%.

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This is the third cut in as many months – taking the rate from 5% to 2%, its lowest level since 1951. Many economists and business leaders will be pleased with the decision, having called for further rate cuts to help stimulate the flailing UK economy – although today’s cut is greater than some predicted.

Plus it is expected that rates could have even further to fall in the next few months with some now predicting Bank rate could drop to as low as 1% in early 2009.

But what impact will today’s cut have on consumers and the wider economy?

Borrowers

There is no guarantee that this rate cut will be passed on to mortgage borrowers. Last month some lenders were pressured by the Government to pass on the 1.5% cut to the standard variable rate but they warned that rates could not go any lower while their own costs remain high.

The vast majority of lenders have announced they will pass on last month’s cut, but only 20% have passed on the full 1.5%. HSBC for example passed on 0.81% of the cut, reducing its SVR from 6.25% to 5.44%.

Tracker rates may have also gone as far as they can, as some lenders have collars written into the deals. This means that no matter how low Bank rate goes, there is a level beneath which the tracker rate will not fall. Many lenders have these collars and some will now come into effect – Halifax’s is set at 3% for example and Nationwide’s at 2.75%.

But for those lucky borrowers who do see their rate drop by 1%, it will equate to around a £86 saving every month on a typical £150,000 mortgage (repayment deal, 25 year term).

Those already on fixed rate deals will see no difference in monthly repayments but new fixed rate deals have already dropped slightly over the last month and could continue to fall in price as Swap Rates, which reflect the costs of fixed rate borrowing for lenders, have fallen steadily.

However, the best deals are still reserved for those with large levels of equity or deposit, and first-time buyers with small deposits are still finding it difficult to access affordable mortgage deals – a situation that looks set to continue.

This dearth of new buyers means that house prices are still falling. According to Halifax house prices have dropped by 14.9% in the last 12 months bringing the price of a typical house down to £163,605.

Savers

While some borrowers have benefitted from last month’s cut, savers have seen rates plummet in the last few weeks. Many providers have cut rates by 1.5% and some, such as Lloyds TSB and Capital One, have cut rates by up to 2%.

Today’s cut is likely to prompt savings providers to cut rates further, making it difficult for many savers to get a positive rate of return (when tax and inflation are taken into account).

Locking into one of the few attractive remaining fixed rate savings accounts is a good option for those who can afford to have their money tied up for a year or more – but hurry to get the best deals.

For those who need immediate access to their savings accounts, making the most of your money is essential by, firstly, using your tax-free cash ISA allowance up to £3,600 and, secondly, using moneysupermarket.com’s comparison tool to find the best easy access rates.

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