UK Bank base rates drop. What difference will it make?
The Bank of England's monetary policy committee met on 6th November 2008 and took the decision to drop the bank base rate by an incredible 1.5%. Not only has this never occurred before, but the last time the base rate sat as low as 3% in the United Kingdom was 1954.
The question is, will this help both ourselves and the economy, both in the short and long term. I am afraid that my answer to this would have to be no, I can't see it happening. The reason behind this is that the lenders will be unwilling to pass on the 1.5% to the public because they were unable to pass on the previous rate cut either. To put it into perspective, their standard variable rate is still at the level that it was more than 6 months ago, go figure.
What has happened in both the UK and in the world markets is that, although the banks have indeed lowered their rates, the rates for funds from bank to bank have not decreased at the same level. The London inter-bank offered rate, or LIBOR as it is also known, is the rate at which the London financial institutions lend between themselves. Now whilst LIBOR has indeed decreased of late, it has not done so as much as the banks base rates. So although base rate drop would seem to help, it does not.
The LIBOR rate is dictated by the willingness of the institutions to loan money to each other. Due to the onset of the credit crunch and the fact that the poor lending policies of the institutions have come to light, there has been an unwillingness to lend between the institutions and this has a knock on effect on the LIBOR. They all know about each other's shoddy lending policies of the past and, due to the down turn in the economy, they do not want to expose themselves any further.
The massive injection of capital which has been promised by the worlds different governments would surely ease the situation, I hear you say. I am sorry but this is not the case. Rumours have come to the fore that a stipulation of these injections is that there will be mandatory set lending percentage increases forced on the institutions over the coming year and with that in mind they are saving themselves for these. I don't know but what is clear is that there is very little money out there and that the rates are poor for any lending that is occurring.
I personally think that todays decision will have the effect of boosting consumer confidence, people will think that low base rates can only mean things are going to get better. That said they will soon realise this may not actually be the case, especially if their particular lender does not pass that increase on to them within their own mortgage. That said commercial finance should get cheaper as most commercial finance deals are based as a percentage over base rates so any deals that have been done in the past will benefit from this cut.
That said a lot of commercial lenders have already increased their over base rate quotes in anticipation for new borrowings. On that same theme many lenders have increased or even withdrawn their base rate tracker products through risk of losing money once a large base rate such as this is suggested. With such a large single rate cut it really makes you wonder whether some parties actually knew this was coming???
So in short will it have any effect? Well may be not in the short term but I would like to think may be even hope that over the coming months this recent reduction will find its way to the pumps as it were. If it doesn't and doesn't soon then all I can say is in the immortal words of Dads Army, We're all doomed, doomed I tell you. Let's hope not hey?
The question is, will this help both ourselves and the economy, both in the short and long term. I am afraid that my answer to this would have to be no, I can't see it happening. The reason behind this is that the lenders will be unwilling to pass on the 1.5% to the public because they were unable to pass on the previous rate cut either. To put it into perspective, their standard variable rate is still at the level that it was more than 6 months ago, go figure.
What has happened in both the UK and in the world markets is that, although the banks have indeed lowered their rates, the rates for funds from bank to bank have not decreased at the same level. The London inter-bank offered rate, or LIBOR as it is also known, is the rate at which the London financial institutions lend between themselves. Now whilst LIBOR has indeed decreased of late, it has not done so as much as the banks base rates. So although base rate drop would seem to help, it does not.
The LIBOR rate is dictated by the willingness of the institutions to loan money to each other. Due to the onset of the credit crunch and the fact that the poor lending policies of the institutions have come to light, there has been an unwillingness to lend between the institutions and this has a knock on effect on the LIBOR. They all know about each other's shoddy lending policies of the past and, due to the down turn in the economy, they do not want to expose themselves any further.
The massive injection of capital which has been promised by the worlds different governments would surely ease the situation, I hear you say. I am sorry but this is not the case. Rumours have come to the fore that a stipulation of these injections is that there will be mandatory set lending percentage increases forced on the institutions over the coming year and with that in mind they are saving themselves for these. I don't know but what is clear is that there is very little money out there and that the rates are poor for any lending that is occurring.
I personally think that todays decision will have the effect of boosting consumer confidence, people will think that low base rates can only mean things are going to get better. That said they will soon realise this may not actually be the case, especially if their particular lender does not pass that increase on to them within their own mortgage. That said commercial finance should get cheaper as most commercial finance deals are based as a percentage over base rates so any deals that have been done in the past will benefit from this cut.
That said a lot of commercial lenders have already increased their over base rate quotes in anticipation for new borrowings. On that same theme many lenders have increased or even withdrawn their base rate tracker products through risk of losing money once a large base rate such as this is suggested. With such a large single rate cut it really makes you wonder whether some parties actually knew this was coming???
So in short will it have any effect? Well may be not in the short term but I would like to think may be even hope that over the coming months this recent reduction will find its way to the pumps as it were. If it doesn't and doesn't soon then all I can say is in the immortal words of Dads Army, We're all doomed, doomed I tell you. Let's hope not hey?
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