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.
The problem that most lending institutions have both here in the UK and around the globe is even though bank base rates have reduced the cost of funds from bank to bank has not fallen at the same rate. The rate at which financial institutions in the UK lend to each other is called the LIBOR rate which stands for the London inter-bank offered rate. Whilst LIBOR has come down very slightly over the last few months it is quite considerably out of sync with bank base rates. So even though money appears to be cheaper it is 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.
You might have thought that the huge injection of capital from governments both here and abroad would have oiled the system but let me tell you this is far from the case. I am unsure why, there are rumors that lenders have been told that as a condition of the injection they have to lend a set percentage more next year than this year and as such they are saving themselves for that mandatory position but who knows. All I know is there is very little money out there, what is there is at low loan to values and the rates are poor.
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 what effect are we looking at, if any? Well, to be frank, in the short term we are probably looking at very little change at all. But still we have to believe that over time the positive knock on effects of this drop in the base rate simply have to reach down to the people on the ground. Otherwise we are facing a very bleak financial future indeed.
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.
The problem that most lending institutions have both here in the UK and around the globe is even though bank base rates have reduced the cost of funds from bank to bank has not fallen at the same rate. The rate at which financial institutions in the UK lend to each other is called the LIBOR rate which stands for the London inter-bank offered rate. Whilst LIBOR has come down very slightly over the last few months it is quite considerably out of sync with bank base rates. So even though money appears to be cheaper it is 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.
You might have thought that the huge injection of capital from governments both here and abroad would have oiled the system but let me tell you this is far from the case. I am unsure why, there are rumors that lenders have been told that as a condition of the injection they have to lend a set percentage more next year than this year and as such they are saving themselves for that mandatory position but who knows. All I know is there is very little money out there, what is there is at low loan to values and the rates are poor.
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 what effect are we looking at, if any? Well, to be frank, in the short term we are probably looking at very little change at all. But still we have to believe that over time the positive knock on effects of this drop in the base rate simply have to reach down to the people on the ground. Otherwise we are facing a very bleak financial future indeed.
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