Interest rates fall to 3%

Economists had been calling for the Bank of England to take drastic action in its battle against recession and it has done just that. The Monetary Policy Committee surprised the City when it voted to cut interest rates by 1.5 percentage points today.

This is the largest single rate cut since 1981 and it takes Bank rate to 3%, its lowest level since 1955, and it signifies the severity of the economic downturn looming over us.

We saw a half point cut in October and despite this month’s one and a half point reduction, there could be further decreases in the coming months with some economists forecasting that Bank rate may fall as low as 2%.

While many had been calling for the MPC to cut rates by a full percentage point, the consensus was that we would only see another half point reduction this month. The decision to slash rates by 150 basis points therefore came as a big surprise and recent gloomy economic data is likely to be the reason behind the MPC’s vote in favour of a deeper reduction in Bank rate. 

Figures released today from Halifax revealed that house prices are falling at their fastest rate for 25 years. Prices fell by 2.2% in October, and the average home is now worth 13.7% less than 12 months ago. Separate data revealed that the service sector shrank for the sixth consecutive month last month, while manufacturing output fell for the seventh month running in September.

However, the big question is whether or not the rate reduction will be passed on to the consumer.

The way banks and building societies respond to this month’s cut will be closely scrutinised amid fears that many will not pass the cut on to borrowers. Interest rate cuts should result in lower mortgage payments for those with variable rate loans but a large number of providers failed to pass on the full half point cut last month.

HSBC has faced heavy criticism for leaving its standard variable rate (SVR) unchanged and earlier this week the bank warned that it may not pass on the cut this time round either. Other major lenders that failed to reduce their SVRs by the full half point include Northern Rock and Abbey, both of which passed on just a 0.15 point reduction, Alliance & Leicester, which reduced its SVR by 0.25 points and Nationwide Building Society which passed on a 0.3 point cut.

The decision not to reduce the SVR affects those paying that rate, but it also means borrowers with discounted mortgages also lose out. Anyone with a tracker mortgage will benefit from the full reduction as their rate is pegged at a set margin to Bank rate.

Someone with a £150,000 repayment mortgage will see their monthly payments fall by £125 a month, saving them £1,500 a year.

However, while borrowers who already have a tracker mortgage will benefit, the same can’t be said for those looking for a new deal as rates on new deals are still rising. Abbey increased its tracker rates by 0.5 percentage points on Tuesday, while Northern Rock, Alliance & Leicester and Cheltenham & Gloucester have pulled their tracker deals today – when they are relaunched mortgage experts believe the new rates will be higher, despite the rate cut.

Lenders argue they have no choice because wholesale funding costs haven’t fallen in line with the Bank rate reductions, but their actions have been widely criticised. One of the main reasons why house prices are falling so quickly has been attributed to the fact that mortgages are so hard to come by and the Government has called on banks and building societies to help alleviate the mortgage crisis by reducing rates and making home loans more widely available. With the opposite happening, and the mortgage impasse continuing, any improvement in the state of the housing market is unlikely any time soon.

For more information on what today’s rate cut means for borrowers and savers watch our latest video blog where our mortgage and savings experts, Louise Cuming and Kevin Mountford, give their analysis.

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