MPC Decision March 2009

The Bank of England has announced that interest rates will drop to 0.5%, the 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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The Bank of England’s Monetary Policy Committee has continued on its interest-rate cutting strategy having reduced interest rates again this month.

Although inflation has fallen significantly [since] last summer, its still above the 2% target, and with the housing market still in the doldrums and after yet another week of dire economic news and huge share price falls, the MPC clearly felt that it needed to cut interest rates again as it seeks to stimulate the economy.

But this is obviously the last thing savers wanted to hear. They’ve already seen their returns plummet since the Bank started slashing rates last October.

The average easy access account is now paying just 0.9% and nearly 200 accounts are paying less than 0.25%, and this number is likely to increase over the coming weeks as we see providers respond to this latest rate cut.

That said there has been some good news for savers recently as we’ve seen some new deals come onto the market offering competitive rates.

The leading fixed rate bonds for example are now paying more than 4% and while this is a far cry from the 7% plus products you could earn last year, it’s still  significantly higher than the current Bank rate. We’re also seeing the Isa market heat up with only a few weeks remaining of the current tax year. Providers are battling to attract new custom in the last-minute rush. It’s therefore really important that savers move their money to maximise returns at this current low interest rate time.

Borrowers also need to be on their guard though. Some will see their mortgage repayment s fall following this latest rate reduction and there are signs that rates for new customers are beginning to edge down, but a number of lenders are still digging their heels in and ignoring the Government’s pleas to pass on the rate cuts in full. HSBC has said it’s not reducing its standard variable rate following February’s rate reduction and a number of other major lenders have yet to announce their intentions.

Therefore if you’re coming to the end of your current mortgage deal or are currently on your lender’s SVR, its well worth looking around to see if you’d be better off by remortgaging onto a different product.

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