MPC Decision February 2009

The Bank of England has announced that interest rates will be cut to 1.0% - its lowest level ever. Moneysupermarket.com editor Clare Francis looks at the reasons for the decision, and how it will affect savers and borrowers...

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Clare Francis: The Bank of England‘s Monetary Policy Committee has voted to cut interest rates for a fifth month in a row, taking the countries official rate of interest to its lowest level ever as we head towards a borrowing rate of zero percent.

The decision was widely expected by economists as the severity of the recession becomes clearer, but it will be a blow to many individuals. In a poll carried out by moneysupermarket.com following last month’s interest rate cut, to which more than 17,000 of you responded, a staggering 67% said you didn’t welcome the half-point reduction. The fact interest rates have been cut again is therefore likely to prove even less popular.

This is because as far as consumers are concerned there seems to be little evidence that interest rate cuts are actually having any positive impact. There will be some borrowers on variable rate mortgages who will see their monthly payments fall, but not all. A number of lenders have already said they are not going to reduce their tracker rates any further and we have already seem many of the major lenders not pass on the full recent rate cuts in full to their standard mortgage rates. Then of course there are those on fixed rate mortgages who haven’t seen any benefit at all following the recent rate cuts.

So what is this month’s decision likely to mean for mortgage borrowers and for mortgage rates? Well I spoke to Louise Cuming, who is head of mortgage services here at moneysupermarket.com, to ask for her opinion.
  
Q1: So interest rates have come down again – fifth month in a row now – is this going to benefit borrowers because obviously we have got some on fixed rate deals and some who haven’t benefited from the recent rate cuts. What do you think is going to happen now?

Louise Cuming: Well, that is the $64,000 question, and my belief is that lenders just wont be able to afford to pass this cut onto borrowers so I think there will be very little difference seen on high street rates, and in fact I think mortgage rates for new borrowers will probably stay very much where they are at the moment.

CF: And of course another rate cut is the last thing that savers want - there are about seven times as more savers than borrowers and these people are already really struggling to make a decent return on their money with interest rates so low – worst affected are those in retirement, are who rely on savings income to supplement their pensions. So what is in store for them? Are we likely to see savings rates fall further? Well Kevin Mountford, who is head of banking at moneysupermarket.com, gave me his opinion.

Kevin Mountford: I guess some with mortgages have benefited, but [with] seven times more savers then borrowers it’s really starting to hit home and it seems somewhat ironic that we are trying to educate and encourage people to save for the future and yet there just doesn’t seem to be any incentives. The only thing I would say is there are still a range of products available and the best paying ones are still worth chasing, so there is quite a gap between the best and the average, so we still need to be vigilant but that message is difficult to take when you realise when you take into account tax, inflation, your money just isn’t working for you.

Q2: So what should savers do?

KM: Well the first thing you should do is as I say be as vigilant as ever - move your money around, make sure its spread, maybe mix [a] portfolio of products to get the best return - and one thing for certain, we are coming into peak Isa season now, there will be a degree of competition in the market, make sure you take advantage of that and use the tax free allowance. You have just got to try that little bit harder to make your money work for you.

CF: But the bank of England clearly saw no other choice but to cut interest rates again. Evidence points to the economy worsening on a seemingly daily basis – we have already seen thousands of job cuts announced this year and last week the International Monetary Fund warned that Britain is likely to be hardest hit by the global downturn and by recession – so further interest rate cuts can’t be ruled out.

So what does all this mean for saver and borrowers? Well, for savers it means seeking out the best returns possible while borrowers should look to take advantage of the current low mortgage rates that are available - that is, assuming that you qualify.

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