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Who benefits from rate cut?

Robert Peston | 13:22 UK time, Thursday, 6 November 2008

I've just had a call from an astonished individual who has several hundred million pounds that he puts on deposit in various banks.

Bank of EnglandAs of 10 minutes ago, a leading British bank was offering to pay him almost 7% interest for his cash.

That was after the Bank of England's policy rate had been slashed by 1.5 percentage points to 3% - an unprecedented reduction in the history of the Bank's Monetary Policy Committee.

Why does it matter that this holder of squillions is still being offered almost 7%?

Well, if he's being paid almost 7%, what chance is there that small businesses will be able to borrow at less than 10, 12, 14% or more (with the actual rate depending on an assessment of their credit-worthiness)?

Those who most need a substantial cut in the interest they pay - hard-pressed businesses, cash-strapped households - are unlikely to enjoy more than a small reduction.

As I described in my note on Sunday ("Why interest rates are not falling") the transmission mechanism from the Bank of England's policy rate to the interest rates we pay has broken down.

Lenders have - understandably - concluded that the risk of lending has risen very sharply, and are therefore demanding much greater rewards for providing credit.

So at a time when all the indications are that we are in a fairly severe recession, and many companies and individuals are struggling to keep afloat, it's a serious worry that even the kind of evasive action attempted today by the Bank of England may provide only modest succour.

Comments

Page 1 of 3

  • Comment number 1.

    I'm confused. Why would a bank pay your friend 7% to borrow his squillions, when, as I understand it, they can borrow squillions from the Bank of England for 3%? What have I missed?

  • Comment number 2.

    This rate cut is like farting at thunder

  • Comment number 3.

    It is absolutely UNACCEPTABLE that, again, it is only the greedy banks that will reap the benefits of state intervention, while poor consumers are left to suffer.

    The govermnment should FORCE the banks to pass on the cut. How can they be allowed to both have their cake (survive with cash infusions) AND eat it (cheap borrowing for them and bigger profits to come)???

  • Comment number 4.

    Would Robert care to pass on which bank is offering 7% interest - and how many hundreds of millions would I need to qualify?

  • Comment number 5.

    I was wondering if there would be a post today! Lowest rate since 1955... Wow! Unfortunately I'm a saver, but still...

    Does this breakdown between the BoE and the High St rates not show the BoE has no teeth. Could the government not force the cut to be passed on?

    Is your slant not to "shame" the banks into doing it (and helping the government achieve this), because they don't have the power?

  • Comment number 6.

    For those of us with a mortgage that tracks the Bank of England Base Rate we are fine.

    The fact that many banks haven't passed on even some of the last rate cut i terrible and I'm sure some won't even reduce their SVR's by even 1% of the latest 1.5% rate cut.

    It is perhaps time for the government or the OFT to investigate mortgages as well as bank overdraft charges.

  • Comment number 7.

    Who sets the LIBOR rate? I know, the Banks, but WHO in the banking world actually sets this rate which is holding our country's economy to ransom? Can someone please enlighten me? Thanks

  • Comment number 8.

    Given that Gordon Brown is insisting banks pass on the interest rate cuts to lenders, it will be interesting to see if the government owned Northern Rock take the lead in doing so.

  • Comment number 9.

    We must not be under any illusion, the Government will benefit; it intends return us all back to the robust and well-managed economy that we all knew and loved pre-credit crunch.

    Here's a quote to underpin my assertion:

    "[GB] said the UK problem was not shortage of demand for homes at "the right prices" but a shortage of mortgages "at the right prices for people to buy"."

    http://news.bbc.co.uk/1/hi/uk_politics/7667284.stm

    This can be coupled this with Gordon Brown's vision of returning the economy back to 2007 lending levels, and articles detailing how house prices will have recovered by 2013.

    http://news.bbc.co.uk/1/hi/business/7692814.stm

    So unless the average wage is about to explode to £58K p.a., any talk about regulation and reform of the lending market is just spin. The Government has bought into the lending market in a very big way, and it has a significant interest in keeping house prices propped up so we all feel rich and start spending.

    We are back on the road to 125% mortgages and mortgages at x6 of your income.

  • Comment number 10.

    Hats off to the BoE, better late than never.

    It won't be a salve for ills but it will certainly help.

    I hope and expect that they will shave another ½-1% at the next MEPC meeting, which is on the 4th Dec.

    Some people have mentioned that it did not save Japan (when they cut rates to zero for a long period) which is true in a narrow sense. However I reckon it would have been much worse without the superlow rate regime.

  • Comment number 11.

    How quickly will my savings rate be cut by 1.5pc while the mortgage rate is reduced by 0.5pc?

    The banks need to pass on the whole cut, to both lenders and borrowers equally. Otherwise we should demand our money back!

  • Comment number 12.

    "Well if he's being paid almost 7%, what chance is there that small businesses will be able to borrow at less than 10, 12, 14% or more (with the actual rate depending on an assessment of their credit-worthiness)"

    Well lets hope so!!! Until all the businesses and all the individuals that have overburdened (including the Banks) go to wall and we can start again a fresh with real cash this problem will not going away.

    The BoE can cut interest rates as much as they likes, but if the Banks aint goin to lend it is irrelevent.

    Lloyds might have promised to cut its rate immediately, but unless you have a massive deposit and a +AAA rating, you aint gonna get a mortgage off them.

    What a complete waste of time.

  • Comment number 13.

    The Bank of England cannot stimulate the
    Economy like this as the Banks themselves will be unwilling to pass on their interests rate cuts to the lenders, the gap between lending out 10%+ and acquiring funds (LIbor) is simply widening as risk is still prevalent.
    Several thinkgs need to happen
    1 Interbank lending (LIBOR) rates need to move nearer to Base rate with the GIVT guranteeing Interbank lending, I do not see the rationale for such a wide discrepancy
    2 Banks should be 'persuaded' to pass on the Interets rate reduction
    3 Banks should also be encouraged to lengthn the loan repayment profiles on ther book to ease the cash flow burdens, oif they are saying that rates to borrowers will remain high because of the risk, then they should ease the TOTAL repayment from their customer by lengthening the term.

    We should all realise that it will take Banks years to get out of this mess, short term thinking and grabbing interest rate opportunities out of the Economy's misfortune seems to me the same short term thinking that got us into this mess in the first place.
    If Banks continue to be this greedy and are suddenly more 'risk averse' then they were 18 months ago, then they should head for the total comfort zone of 100% nationalisation and lets have a macro level solution and consistent behaviour towards this issue.

  • Comment number 14.

    Great !

    What about the savers for crying out loud.

    Im very tempted to I just blow the lot and just borrow to the hilt then default and just add to the debt mountain...


  • Comment number 15.

    As a saver, I am very glad that banks may not pass on all of this cut.
    Could someone explain just who does pay the official central bank interest rate? And what happens to the interest payments? (And why can't we all borrow from the central bank?)

  • Comment number 16.

    Not convincing this I am afraid, I expect by the end of this day; many lenders will be advising of rate cuts.

    Your friend may well be offered 7% and if the banks are lending that out as credit card debt for 20% its good profit. You are confusing this one lender for this one deal with this one person with squillions.

    The banks can get cash much cheaper cash than 7% well in excess of your friends squllions, from normal depositors, and you know it. As the first respondent said ''am I missing something?''.

  • Comment number 17.

    As one economist said recently, "It wasn't high interest rates that got us into this mess, so what is the point of lowering a low interest rate?". There aren't any solid precedents which indicate that this rate cut will improve the situation, and it seems unlikely that the cash-strapped banks will want to collect less revenue from the loans on their books by reflecting this reduction in the price of their mortgages. I am certain that not one institution will want to reward the savers who help to shore up their balance sheets by retaining an attractive savings rate so, as Robert says, who exactly does this rate cut benefit? The boom situation we were in directly before the Credit Crunch will never return under current financial systems and rules, so why try to get banks lending at excessive levels all over again?

  • Comment number 18.

    Shouldn't the government show the banks how its done and pass on this BOE rate cut by reducing the rate on the new RBS, HBOS and LTSB preference shares to 10.5 percent?

  • Comment number 19.

    Cutting rates by 1.5% in one go smacks of panic - it could be more problematic than it is worth. I think they should have cut by 1% today with more to follow...

  • Comment number 20.

    yet again the rich get richer and the poor suffer even longer.
    oh those poor banks needing handouts from other sources for years they have had every thing there way charging what they like and making large proffits that went to pay huge bonuses and other extras no thought of the future becouse there is always a way of making money.
    they have helped themselves to the cookie jar too often and now they are squirming becouse hard times hit, greed is no excuse for bad over paid management.
    so the old lady of thread needle street has cut the rate but the public will be lucky if they see any of it no general banks will keep there higher interest rates to squeeze more money out of mortages and loans.
    so the rate reduction will only help the rich.

  • Comment number 21.

    The people who will fund this interest rate cut are the retail savers as this will allow the banks a further opportunity to cut the rate they pay to depositors whilst still keeping their margins high when lending out. Is this just designed to help the banks rebuild their balance sheets?

    This sort of decision always makes me wonder what is in the minds of the regulators. Are they just making a statement? if so, why and what do they mean?

    This will as you say have a very marginal rate on the flow of credit in the economy. It already has debased sterling in the international money markets and, no doubt, will be used again as a reason to sell the pound short as the required result fails to follow through.

    I agree with your comment that this will only provide modest succour. Perhaps you should reshape the use of the word `succour'.

    The average citizen is being suckered. We are having to support the banks from our taxes and support the economy from our savings. What happens when we lose our jobs?

  • Comment number 22.

    Was this post written by Robert Palin??

  • Comment number 23.

    Typical- reduce the base rate- let the banks cream off more money to put their books straight- the customer still pays the same -presumably till the pips squeak-and are financing the bail out of the banks with their own taxpayers money- ever feel as if you have just been screwed.

  • Comment number 24.

    Can I have your phone number Robert,



    I have several hundred millions I need to deposit.

    GC

  • Comment number 25.

    1. Does this all mean that the Bank of England has lost control of interest rates?


    2. With the Prime Minister touting a likely cut and Peter Mandleson pressuring banks to pass on the rate cut before it happened, show that the Bank of England is no longer independent? If that is the case should we plebes not be told??

  • Comment number 26.

    This supposed rate cut is timed to try to boost Christmas sales and help companies turn massive stocks into cash.

    Hoping consumers will be kidded into thinking things are improving and they will once again have lots of cheap money to spend.

    After Christmas many will be thrown out of their jobs as the flow of money to spend has dried up.

    Not so much a matter of confidence.

    Just a cruel confidence trick.

  • Comment number 27.

    Robert, surely you have missed the point.? Those personal borrowers with deals linked to base rate i.e. tracker mortgages or businesses with their business loans base rate linked will feel the effects. Only those crazy enough to be wanting to borrow new money or re-negotiate their existing deals will see very little difference from this morning. Surely the vast majority of people are not looking to borrow new money and with such a small percentage of borrowers sat on lenders SVR's, this will have a hige effect. I have had numerous calls from friends who have worked out how much better off they are a month and already working out where they can spend it - so it looks like the BOE's plans are workng, we will all be spending our gains! What will be interesting is how much those banks who went cap in hand to the BOE for the bail (hand) outs reduce their SVR's!

  • Comment number 28.

    As a saver, this could be disastrous!
    Surely the large amount of people saving and acting responsibly with their money should not have to pay the price here by a substantially reduced income?
    What are the incentives to save any more?

  • Comment number 29.

    The banks' first committment must be to those whose money they hold as deposits. If they don't pay a decent rate to the depositors, they won't have any money to lend. Why should they lend cheaply, they are in business to make profits , not to risk their depositors' savings dishing out cheap loans to dodgy businesses or overstretched mortgage holders who have taken loans they cant service. As for the government shifting the blame for the lack of lending to the banks, their policies of unbridled borrowing and low interest rates caused the problem, and their high tax regime is locking the economy into recession. The lowering of interest rates is effectively a devaluation of the pound which will lead to higher domestic fuel costs,and higher transport costs which in turn leads to an increase in the price of all commodities. Artificial attempts to control supply and demand do not work, and will cause even more problems.

  • Comment number 30.

    It may be that the main advantage of this to the Government is to cut the cost of Government debt by dropping interest rates at NS and I - they at least have got to follow the BoE rate down.

    Those who have shunned the banks by looking for the safer haven of NS&I will now have to face the risk in the banks or get almost no return on their savings, so in that respect it might be good news for the banks.

  • Comment number 31.

    It may be that the main advantage of this to the Government is to cut the cost of Government debt by dropping interest rates at NS and I - they at least have got to follow the BoE rate down.

    Those who have shunned the banks by looking for the safer haven of NS and I will now have to face the risk in the banks or get almost no return on their savings, so in that respect it might be good news for the banks.

  • Comment number 32.

    There's something not right here. The line we're hearing from the government is that it's good that there is a huge rate cut so that us ordinary folk will actually see some rate cut, which we wouldn't see at all if there were just a small rate cut.

    So in other words, they are expecting the banks to rip us off, and only to pass on a tiny fraction of the rate cut.

    Wouldn't it be better if we had some sort of system of regulating the banks (I'm sure this was talked about once upon a time)? Then they could be made to pass on rate cuts. Or would that be too much interfering with the cherished "free market" that has served us so well in recent years?

  • Comment number 33.

    So far as I can see, the only people to benefit from this rate cate are the irresponsible borrowers who contributed to the problem in the first place.

    There's absolutely nothing in it for anybody who's been prudent...

    Its a completely ricadoolious way of running the economy.

  • Comment number 34.

    So will the loss making Housebuilders be Nationalized ?

  • Comment number 35.

    Despite being heavily in debt, this rate cut is highly unlikely to affect me.

    Our mortgage was re-fixed at approximately 6.5% for five years back in July.

    We also have a secured loan on our house, with a High Street bank, and it seems that everytime the interest rates have dropped, our loan has gone up due to "current market conditions". I believe the current rate is around 10%. No wonder my bank is one of the few not to need government assistance.

    I don't think the rate cut will kick-start the housing market as buyers will now be holding out for new, better deals from the banks.

  • Comment number 36.

    Was it Nat Rothschild???

  • Comment number 37.

    By the end of 2009, you will have to pay the bank to save with them, while the bank will pay you to take a loan.

  • Comment number 38.

    Abbey owned by struggling Santander, has raised its mortgage rates to new customers !

  • Comment number 39.

    #9 Total Injustice

    The government have bought into the mortgage market in a big way. Does this not mean that in order for them to get their (our) money back they HAVE to ensure the housing bubble doesn't deflate further?

    Otherwise the "assets" they hold will reduce even further? Or do they just hand those back to the banks in return for cash, whatever the current value at the time? This would mean the government couldn't make a loss or a gain?

    If they can, they need to manage the mortgage market very carefully, which is counter productive?

    Could someone enlighten me?

  • Comment number 40.

    Can anyone tell me what effect (if any) the rate cut to 3% will have on the Libor rate. The reason I ask is that I self cert on my mortgage and my rate is governed by the Libor rate and not the bank interest rates.
    Thanks

  • Comment number 41.

    So which big Housebuilder will be the first to go bust ?

  • Comment number 42.

    Amazing and shocking to see a 1.5% reduction! What other blunt tools have the government and BofE left at their disposal in an attempt to soften the expected severity (and length) of this approaching downturn? It seems that we may continue to see saving rates (for high net worth individuals or otherwise) outstrip the level of falling base rates. The signal is now the BofE believes inflation is no longer going to be a problem. So far, the post announcement GBP/USD rate is holding. What should concern us is the risk of dropping into a deflationary cycle.

  • Comment number 43.

    Of course Deposit account savers will lose out, House prices are still falling, real wages are still falling, (mainly due to wage restraint in the public sector), business confidence is still falling.

  • Comment number 44.

    Having read the first few post, I am amazed!

    50% of people have fixed rate mortgages and a lot them had to renegotiate in OCTOBER. Doh!!!

    For the fortunate 10% of mortgage holders on a tracker the entire economy is resting on them buying a car, fridge, more loans etc

    Get a life - These cuts and all the further cuts are absolutely useless. Noboddy can borrow, nobody wants to borrow, those that NEED to borrow should be laid to rest.

    We are at the point where interest rates are blunt as Alaistairs red pencil

  • Comment number 45.

    Calm down ... calm down

    Even before the crunch, my own bank always took until the next day to pass on any interest rate cuts.

    It is a bit unreasonable to jump up and down like this a mere two hours after the BoE gave them a surprise cut like this. Let us see what tomorrow brings.

  • Comment number 46.

    Peston - just like you to brag about your mate's with... 'Loads of Money'.... Your actions in these past months (Northern Rock & HBOS should be under investigation by the FSA.

  • Comment number 47.

    #3 Cash infusion ?? What cash infusion ?? So far that has been just talk. Until the "cash infusion" becomes a reality, I think the banks will be very cagey about lending to anyone without a good credit background !!

    Of course, the government can "force" the nationalised banks to throw good money after bad assets. However, NR seems to be chucking customers out rather than taking on more of them !! So much for "forcing" banks !!

  • Comment number 48.

    A consolation for those wanting to buy a House.

    Repossessions should be getting cheap as chips.......

  • Comment number 49.

    I wonder how many unemployed bank Clerks will face repossession ?

  • Comment number 50.

    Robert

    I suspect your friend may be pulling your chain or your use of the word 'leading' to describe this bank is misplaced. HSBC is not paying anyone close to 7% not for a deposit account.

    As a saver i am losing out today. Clearly the rate of inflation has not fallen yet and may take some considerable time to do so. My pension is down about 35% compared to last year. In the meantime after deducting 40% income tax on the gross interest my savings receive my cash is losing value quickly. Well i suppose thats Labour through and through; bleating on about social justice while building a casino economy and now having no option but to rob the hard working and truely prudent who live within their means. I never voted for them because i had not forgotton the last time they were in power and the chaos and near collapse of our proud country then.

    Fortunately some justice is unstoppable and that will be the removal of this awful collection of rag, tag and bob-tail masquerading as a government and those who cannot afford their life styles without spending on credit at a level that anyone normal would describe as prodigality, will lose them.

    Yvette Cooper can bark all she wants at those banks that have begun refusing to further foolish and underpriced loans, but virtually no one who matters cares a jot for views because it is not her money to waste. We are tired of her government starting wars, flooding our country with free loaders and now eroding our savings.

    I wish they would just all boom and bust off.

  • Comment number 51.

    33 Anyone who has bought Shares, invested in a Pension plan, or just put some money on deposit ,will in the end lose out.

    Inflation and low pay rises, plus loss of choice in the shops will affect everyone.

  • Comment number 52.

    Have you checked your Pension yet ?

  • Comment number 53.

    My bank (HBOS) is still offering 6.5% fixed for a year on deposits.

    With the base rate at 3% now, I can theoretically get at worst a 4% tracker mortgage.

    So if I could persuade someone to lend me 100 mill (unlike Robert's chum I'd sadly have to borrow it), secured against a HBOS deposit, I'd make 2.5 mill in a year and never have to work again.

    Any lenders out there interested?

  • Comment number 54.

    Robert, Why is LIBOR so high and furthermore, why is the Bank of England not part of that 'interbank lending panel'? What is the point in having a Central Bank if it has no influence in the 'wholesale' markets? Why not just have a gigantic PINK china piggy bank in Threadneedle Street, for all and sundry to raid? PLEASE PLEASE explain WHO ARE the members of the wholesale markets? If Hedge funds can be regulated why not the WHOLESALE marketeers?
    So many questions.....

  • Comment number 55.

    So if I'm a fiscally responsible borrower who decided to fix his mortgage rate to a level that he knew he could service, I lose out to the person who gambled on a tracker. Fair enough, it was my decision and I can live with that. I'll probably try to fix again when this deal comes to an end and with any luck it'll be at a lower rate. I don't think that, 2 years ago, anybody thought we'd be seeing this sort of variation in the interest rates coming along, but hey ho, I lose. I don't blame the banks - indeed, what would we do without them, but there appears to have been an awful lot of political pressure from the government to drop rates and I don't see the government doing anything for me apart from spending my next 30 years of tax.

    Of course, I'm also a saver, but to what gain? Less interest, and I'm still taxed on that. I lose again.

    But for those complaining about banks not passing on rate cuts, that's just greed on the individual's part. Unless your savings are in excess of your mortgage, any drop in your mortgage rate is a bonus and to whinge that it's not enough is to blame someone else for your own greed in choosing the house you bought and taking out that mortgage in the first place.

    I may be in debt, but at least I'm prepared to live with decisions that I made of my own free will.

  • Comment number 56.

    No matter what the economic situation,

    "The rich get richer and the poor get poorer"!

  • Comment number 57.

    So those who are better off will now spend more to get back into BAD debt because their mortgage payments have gone down its a "Full circle"

  • Comment number 58.

    How can a BoE interest cut immediately affect the banking interest rates while there is still a big taboo (with a long history) among UK banks to borrow money from the Bank of England? Recall that the run on Northern Rock started when NR decided to actually make use of their (so far theoretical) ability to directly borrow money from the BoE at the base rate. A bank actually taking money from the Bank of England is seen in the UK as a sign that this bank is in bad shape about to crumble. It is only done here as a last-resort measure.

    Other question: With the UK base rate finally below the eurozone baserate, can be please now rescue our crumbling economy by joining big euroland? Aren't all of Gordon's criteria are now fullfilled?

  • Comment number 59.

    What we need is, not the Bank of England reducing base rate, but the Government reducing taxation. Instead of lecturing the oil and energy companies about lowering prices Gordon, just give us some of our money back (PS I'm not holding my breath).

  • Comment number 60.

    How much bad news have the Building Companies got up their sleeves and when will they let us all know ?

    Presumably not selling any Houses means they will make a humungous loss......

    With more job cuts to follow.

  • Comment number 61.

    It is clear that bailing out the banks has once again protected this industry at the expense of the consumers. Basically, because of the moral hazard of letting banks fold, we the UK taxpayers have to pay to get the bankers out of jail. Yet, we don't get anything out of it as they use interest rate cuts to rebuild their balance sheets at the expense of other businesses.

    Why don't we stop banks from fractional reserve lending? Let's make funds available from central banks to those who have good security at the Bank of England rate.

  • Comment number 62.

    Oh dear-those of us who have been prudent are likely to suffer again.

    Having saved and saved for that rainy day, with two children at University, an out of work husband, and no help from the State, we will see out savings income drop while those who have overstretched themselves are helped.

    Bitter-you bet!

    We are lucky, I suppose, that we have those savings but we had hoped they would see us through. Instead, my husband will have to draw from his Company pension 7 years early as , at the grand old age of 53, he appears to be unemployable!

  • Comment number 63.

    Lloyds TSB announced prior to this announcement that they would pass on any reduction to all mortgage account holders with a variable mortgage rate.

    My mortgage is with HBOS (who I understand are not part of the 'LLoyds' Group yet.)

    The fact that my Mortgage Company are relying upon Public Funds to support their 'predicted' merger but have yet to announce that, at the very least, it is being passed onto those with variable mortgages rate speaks volumes.

    I have always had a variable mortgage and every interest rate increase has been passed on in full.

    If HBOS wants the 'State' money it must tow the line and if the fail to do so, the Government must enforce it.

    And, in passing, I know it's not good news for retired 'savers' and I am acutely aware (from my own close relatives) of the effect that this will have on them, however, all those retired savers still receive a basic 'State Pension' and they must remember, that those persons still in work, like myself, effectively pay for that 'basic state pension' - if this interest rate cut keeps more persons in work and thus paying contributions to the state, then it is to their benefit.

  • Comment number 64.

    One easy solution for the governemt to help the majority of people who need assistance....Northern Rock or B&B to offer reasonable rate mortgages (+1/2% above BOE base rate on most LTV's) therefore enabling cash strapped families to be able to re-mortgage at a reasonable cost (without inflating the housing bubble again) which will then FORCE all the major UK bank and building socities to lower their rates in order to remain competitive. As a side benefit tax payers get their money back quicker through this increase in market share of the nationalised banks. The stick is the only thing that banks will listen to. They are now and never will be again entitled to complain about 'state intervention' and 'let the market decide'. The market decided they were all lame ducks this year and without (our) tax payers money the majority of them would be be collecting their P45's.

  • Comment number 65.

    I too would like a simple explanation of what the base rate actually is, and who pays this rate to whom.

    I had heard that it was the rate at which the Bank of England paid money to the commercial banks when they deposit money with the Bank of England.

    Is this right?

    Before that I thought that it was a rate at which the Commercial Banks could borrow from the Bank of England at.

    I would like someone to explain to me just what it is.

    Thanks.

  • Comment number 66.

    Banks will pass on the cut. But to savers not borrowers. Actually I have just found out that my bank slashed interest rates by 0.5 percentage point on both my saving accounts I have with them last week. I wonder what happens now. The level of inflation is already above the interest rates, and so my savings are shrinking.

  • Comment number 67.

    Savers shouldn't be upset. The reason the BoE is reducing rates is because the inflationary pressure has gone away. Infaltion could even be negative soon, which means the real rate of return of a 3% base rate could be quite high. It's a much better return than 5% interest during a time of 5% inflation!

    And I'm delighted, because I've got a tracker mortgage and I'll be £200 a month better off.

  • Comment number 68.

    Who benefits from rate cut?

    1. The banks - gives them a chance to build their reserves up.

    2. The government - Glenrothes anyone?


    The hoi-polloi won't benefit, capital depreciation has now been re-established that the bank rate is less than inflation.

    Those who have scraped and saved to buy their homes and provide for a pension have been sold down the river; house values dropping like a stone and the pound being devalued to bail out the banks.

    The message is clear; spend and borrow to the hilt, live off the rest of us.

  • Comment number 69.

    #21 "Are they just making a statement? if so, why and what do they mean?"

    just an uneducated guess, but I think it means that Gormless Gordon did *NOT* get the hard cash support that he had been hoping for from the Arabs and he has to show that he is "doing something" to the voters in the coming by-election !!

    In military terms, it's called a diversionary tactic !!

  • Comment number 70.

    I don't understand one thing. As one reader commented the banks will only lend to businesses and individuals who have a AAA+ credit rating. The same banks that WE THE UK TAXPAYER, bailed them out because they couldn't manage their own finances. What now happens TO THE UK TAXPAYER (and don't forget UK SMALL BUSINESSES who pay an extortionate amount of tax in the form of Business Rates, the biggest rip off ever) who don't have a AAA+ rating . The banks have been given a fresh start - do UK TAXPAYERS get a fresh start and have their credit histories wiped clean or do we have to continue to be penalised for years to come. PS. Does your friend with squillions want to lend me £20000!!!!!!!!! I'll pay him more interest than the banks!!!!!!!
    PS. A form on business rates and what businesses get for their money would be a great point to debate.

  • Comment number 71.

    The banks cannot pass the whole cut on. They need to build up their capital base, reduce their leverage and pay back us the taxpayer, therefore they cannot pass the whole rate on.

    Well they could, but only by bringing in significant bank charges for all transactions.


    Commentators who for the past few weeks have been saying that the BoE, HMG and the banks themselves have virtually no room for manoevre, made that assumption factoring-in deep interest rate cuts because it was obvious that was going to happen.

    We are, despite a 1.5% cut, in serious serious trouble.

    Remember, dropping the base from 4.5 to 3 is actually a 33% cut which is staggering especially when you consider that it's not designed to stop a recession, just slow it a wee smidgen.

  • Comment number 72.

    I revceived nearly 10 emails from various lenders with in 30 minutes of rate cut, saying they were revamping their rates and products. They were shell shocked and spooked by the reduction and trying to make more money by taking off all their trackers and just leaving the fixed rates on their list.
    NEVER TRUST A SINGLE ONE OF THEM!!

  • Comment number 73.

    All this talk of mortgage lenders being irresponsible in the past - but what about those who deliberately pushed the system beyond sensible (and legal limits) and helped create this financial chaos !

    Oh yes, of course. I refer to Lord Mandleson of Borrowdale - who took a large secret loan to buy a house in London because the legitimate mortgage on offer (properly proportioned re his salary/outgoings and debt repayements) wasn't enough for his humble designs!

    The classic sub-prime borrower, surely. No fault of the banks or building societies who clearly took his application on trust. If you can't trust the word of an MP......?

    His reward for this deceipt? A seat in the Lords with a mission to help unravel the financial mess.





  • Comment number 74.

    Hmm...this feels familiar, here in the US.

    An outgoing Republican administration, having suffered the death of a thousand cuts, a fresh-faced idealist Democrat riding in from nowhere to take over, promising everything to everyone in sight.

    Money supply booming, but no one borrows, because no one trusts the future.

    Auto industry on its backside, going begging to Washington.

    The stock market--don't even go there, girl....

    Land wars in Asia, which need winning.

    It's stagflation time--it's the 1970's!

    Now, where did I store all those disco records?

    Thanks, again, Mr. Peston, for helping us sort it all out. Well done!

    *******

    As for the bank--they want cash to lend without Mother Government breathing down their neck.

    This all gets better when government is trimmed way back, taxes are drastically lowered(including elimination of capital gains tax), and the auto industry decides it's in the business of selling cars to consumers, not running a welfare state for its unions.

    I'm not expecting help to ride over the horizon anytime soon.

  • Comment number 75.

    Of course, the arbitrary and unjust nationalization of Bradford and Bingley , and Northern Rock, has shown international investors just how dodgy and untrustworthy our stock market is.

    Thats partly the Govt's fault, mostly down to the foolish behaviour of hedge funds and shortsellers, in breaking their own toys.

    However, the real long term investors are now boycotting the market as they can see things are not going to get any better for some considerable time to come.

    Most of the foreign investors have taken their money home.

    After the Banks, the Building companies, tell me I'm wrong!

  • Comment number 76.

    Can someone tell me how cuts in interest rates will stimulate the economy?

    With an ageing population it's the over 50 babyboomers who have the discretionary spending power.

    If savings rates drop I for one will defer or cancel planned spending - most of which would have been within the UK economy.

    Meanwhile, either the banks don't pass on the rate cuts or they do and we see the expansion of the unsustainable debt that got us into this mess in the first place.

  • Comment number 77.

    Help the economy ?,my back side,this only helps the greedy banks to be even more greedy.
    I wonder if this country will ever get a Labour government again cause this one sure is not.

  • Comment number 78.

    a)i f competion between banks is working then rates will fall is commercially viable.
    Or has there been so much consolidation that this no longer works?
    b) the past is the past, and if the banks are not seen to be lending prudently why should I lend them money at low interest especially if I think the government is forcing them to lend money which is not commercially prudent.
    c) If the rates are not kept up how do the banks pay the government 13% for preference shares.
    d) if the rates are not kept up how do the banks and building socs pay for the Icelandic money via the FSA. Mr Brown et al kindly said that their own rules didn't apply and all amounts, even over £50 k, would be paid for,in one form or another by borrowers.

  • Comment number 79.

    We need to remember that low interest rates do not just stimulate borrowing for consumer purchasing (including houses) -thereby stimulating demand and production. Another effect will be to remove the "cash is king" incentive for investors to go liquid. If your cash in the bank is paying low interest, the pound is falling and inflation is rising (all side effects of low interest rates) then equity investment in UK companies that can maintain substantial dividends looks good again.
    Although there is much doom and gloom in productive industry they will all benefit from the same factors; -low interest rates, higher consumer demand, falling pound. Bigger worldwide operators, the oil companies and Rolls Royce etc will benefit from relatively higher US dollar.
    The BOE is doing the right thing. Now those with Squillions should be re-investing and re-vitalisng the equities markets that are so important to overall economic confidence.

  • Comment number 80.

    The interest rate cut is great news for mortgage payers if the cut is passed on - but is dreadful for savers. But lets have a bit of reality here, house prices just got out of hand they were totally out of touch with wages and they need to drop, Negative equity is only bad if you need to move.

  • Comment number 81.

    To the person who asked which bank will lend money at 7%. If you go to moneysupermarket.com you will see that 3 banks are lending at 7% to 7.1%. AND you don't need squilions of money ! One of the accounts only requires a minimum of £1, one £500 and the other £1000 !!!!!!!

  • Comment number 82.

    #28

    "As a saver, this could be disastrous!
    Surely the large amount of people saving and acting responsibly with their money should not have to pay the price here by a substantially reduced income?
    What are the incentives to save any more?"

    I think you've kind of missed the point. We are heading into a recession; we need people to spend money. So, yes, there is less incentive to save.

    GO SPEND!

  • Comment number 83.

    It will not make any difference. Even if they reduce intrest rates to zero. The money has gone and the only way to get it back is by either windfall taxing the passed bank bonuses or by letting many people suffer.

    Money has been sucked out of the banks by the greedy bankers and has disappeared into their own pension funds. Either we get it back off them or we end recapitalising the banks ourselves through excessive intrest payments or tax. Which ever way you look at it, it boils down to quite a simplistic problem. The mony has been legally stolen and we need the government to get it back for the people.

    In around 118AD, Hadrian won great popularity by cancelling massive amounts of debt. Can we learn something from this?

  • Comment number 84.

    Nobody seems to understand that Bank Rate is a symbol and nothing else. Lending rates depend primarily on the cost of funds. Some of the banks that are now under fire are paying the treasury 14% for their billions of bail out money. They cannot now go to the discount window and borrow at 3% to repay the billions costing 14%.

  • Comment number 85.

    All I can think is what amazing things could be done if this individual withdrew some of his "hundreds of millions of pounds" and distributed them to charity or medical research organisations rather than keeping it in the bank.

  • Comment number 86.

    Forgot to add that a lot of lending will have been fixed interest for 1/2 years so rates reductions cannot be reflected immediately?
    My loans to Northern rock are at 7% with some way to run.

  • Comment number 87.

    The banks may say that interest rates remain high to reflect perceived risk. Even if that is true, and it is in fact more likely that they are simply profiteering/'rebuilding their capital base', the interests of the COUNTRY demand they pass on rate cuts. There is no argument against this, since they can still use tighter lending criteria. If they will not behave responsibly, the state must take powers to compel them. This is an issue of national economic survival.

  • Comment number 88.

    "I've just had a call from an astonished individual who has several hundred million pounds that he puts on deposit in various banks."

    I have this uncle with several hundred squillions locked up in a Swiss bank account. All it needs is for a few hundred millions to be deposited in another Swiss bank account. You can share in the squillions when it is unlocked.

    Please send the cheque to Lagos, Nigeria 419 !!

    Thank you, kind sir !!

  • Comment number 89.

    Why not just take your saving's out of these greedy bankers bank and put it into Premium Bonds, we are going to get next to nothing in interest off them anyway, either that or stick it under the matress.
    You may get lucky.

  • Comment number 90.

    I don't know what you are all talking about I have 20 different buy to let mortgages and the 16 that are not fixed, have passed on all the cuts in full.

    I also have a small business loan of £3/4 million whose rate is also linked to the base rate and has the cuts passed on in full.

    The only people i know who are not getting the cuts passed on are those on a fixed rate.

    Who are these people who are not getting cuts?

  • Comment number 91.

    Shame on the BOE, they have given no thought to the pensioners who rely on interest from savings to survive.
    How many more will have to do without heat or food this winter.

  • Comment number 92.

    Can you pass the details of this individual onto me, i would be extremely grateful if he could lend me £50,000 out of his hundred's of millions so i can clear my debt. that probably is only a couple of moths interest. Thanks

  • Comment number 93.

    This rate cut strikes me as the panic mode of those headless chickens masquerading as economists. There are people out there who understand how to produce simulation models of complex, non-linear systems. Those engineers who mathematically model large process control systems, or the people who produce the simulation models for modern weather forecasting. These are the guys who can define the transfer-functions of the building blocks that form our economy, not the super-annuated BOE and government economists, and certainly not the cub reporters pretending to be business journalists.

    The problem was originally caused by too-low interest rates, making them even lower will mean that the reckoning next year will be harsh indeed.

  • Comment number 94.

    I'm a little offended by reading comments from "unhappy" savers. For crying out loud! There is too much selfishness in our society. The country is heading into recession and the government/BOE is at least trying to do something about minimising the impact. Give them some credit for that. What we don't need is selfish singleminded people moaning that their savings rates are falling. Get a grip and think about the people that the interest rate cuts might be helping and realise that you could indirectly benefit from it too. Inflation is falling, in fact you'll be better off even at a lower rates as long as the rate of inflation, as expected, falls lower.

    I am a saver too but I'm not moaning because I understand that action needs to be taken to save our economy. If any measure helps to minimise the impact of the recession, I've got a better chance of keeping my job. I'd take that over a higher savings rate.

  • Comment number 95.

    #67 "which means the real rate of return of a 3% base rate could be quite high. It's a much better return than 5% interest during a time of 5% inflation!"

    Will it also be better if the quids you get are worth US$1 (70 Euro cents) each ??

  • Comment number 96.

    Such a drastic move shows that it is now officially time to panic.

    The problem is, this should really have been a rate cut from a substantially higher position, perhaps from a rate of 7% or more.

    Had the Bank of England been tackling true inflation, which includes the cost of a home, then interest rates would have been higher all along. For some reason inflation in the cost of groceries is an awful thing, but inflation in the cost of our homes is splendid, and is to be encouraged even through policy. Idiotic.

    Higher rates might also have reduced the scale of the boom and put the brakes on the grotesque binge on debt that has gone on over the past few years.

    Now we have only 3% headroom to avoid falling into the liquidity trap and suffering a long drawn out depression similar to that experienced by Japan.

    I mean, seriously, if interest rates of 4.5% on borrowing are considered extreme and too painful for us then what does that say about the distorted view of risk that has developed over recent years?!

    The truly silly aspect is hearing the Government tell banks they should pass on the rate cut, when they themselves will be pushing up the cost of borrowing through the 'crowding out' effect of their fiscal policy...

  • Comment number 97.

    Do these funds relate to profit taken from your insider dealing syndicate?

  • Comment number 98.

    I'm laughing! My tracker mortgage with C&G will have now reduced by 36% in two months!

    Bring on the bubbly...

  • Comment number 99.

    Credit Crunch – wasn’t that the obvious result of lending money too cheaply. Good to see the BoE have got a firm grasp of that one then.

    BoE remit – just the one target, nice and easy, keep inflation to 2% give or take 1%. Now that they have failed on that they go back to crystal balling where the economy is going next.

    Labour Government – a fantastic earning opportunity, wait till they have been in power a couple of years (this gives them time to spend the inherited coffers) then short the pound for all your worth against any major currency except US dollar.

    Banks – the people who missed the last market rise on the back of the Iraq war so decided to invent a credit crunch, amass loads of money and create the next boom.

    Stability – that thing that companies crave more than anything from government, static interest rates (whatever they may be) and near fixed exchange rates, it allows them to plan.

    Volatility – what the market players need, without their dead. Shame it’s the opposite to what business’ need but hey, there will always be more of them when the present lot go broke.

  • Comment number 100.

    These 'wise' men has reduced interest rates to rates not seen since 1953.

    The inescapable conclusion must be:

    - this is the start of a great depression on a scale even deeper and longer that the 1930s.

    Or

    - Rates should not have been reduced and the 'wise' men who gave us the bubble economy and credit crunch have got it terribly wrong are we will see and even greater bubble and crunch in a while.

    Time will tell.

    It is widely accepted that the twin causes of the credit bubble were imprudent banking combined with central banks having interest rates far too low for far too long.

    The test of these 'wise' men will be if in a few months (6 at most) they return interest rates to proper levels of 6 of 7 per-cent. (And no further rate cuts.) If not this gamble will have failed and we will all be bankrupt. Then it really will be twenty years of hard slog. This is the last throw of the die.

    If the idea is to kick-start the economy then OK - but it must ABSOLUTELY not be to create an economy that runs continuously at these insanely low interest rates. If this is the result then we will have see just how 'wise' these men have been.

 

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