Bank of England
announce historic rate cut

The lowest interest rate level since 1694

The Bank of England cut its official base rate for the fourth month in a row as it attempts to shore up the economy. For the first time since 1694 interest rates have fallen below 2 per cent. On January 8, 2009 interest rates were cut to 1.5 per cent, the fourth time since October last year.

The Monetary Policy Committee (MPC) reduced the base rate by 50 basis points, the lowest figure in the Bank of England's 315 year history. It has now fallen 3.75 per cent over the past twelve months, a reduction which few would have predicted at the onset of the current liquidity crisis. The announcement may help those with tracker mortgages in particular

Council of Mortgage Lenders, director general, Michael Coogan said.

"This cut is a double-edged sword for retail based lenders. While lower mortgage rates provide borrowers with the opportunity to repay their mortgage debt more quickly to reduce the term, lower savings rates impact lenders' ability to attract deposits and maintain the flow of mortgage lending in 2009."

The market is still not functioning properly and is likely to lead to a fragmented approach by lenders, as they try to balance the interests of savers and borrowers and other pressures on their businesses, in responding to the announcement."

Commenting on the Bank of England's interest rate decision, Royal Institute of Chartered Surveyors chief economist, Simon Rubinsohn said:

“The decision to lower interest rates to just
1.5 per cent, while welcome, is unlikely to provide any meaningful encouragement for banks to increase the availability of finance to either households or businesses.

“Indeed, the risk is that lenders are set to become even more restrictive over the coming months in the face of the worsening economic climate. With many first time-time buyers unable to find the finance to take an initial step onto the housing ladder and existing owner-occupiers needing to move similarly blighted, the time has come for the government to take direct action to restore an orderly property market.”

Even before the announcement, the Association of Mortgage Intermediaries (AMI) had warned that any cut would merely serve as a distraction from the lack of liquidity afflicting the market.

Robert Sinclair, director of AMI, said,

"The 50 basis point cut is recognition that there are still fundamental issues facing the economy, which the government needs to address. While not inconsequential, the Committee's decision will have little effect on the real problems faced by the mortgage market."

The majority of borrowers with mortgages are linked to variable rates, and even with this historic cut in interest rates, many borrowers are unlikely to see any change in the interest they pay. During December last year almost three quarters of lenders failed to pass on the base rate cut to borrowers on variable rate deals. In addition, about half of all borrowers are locked into fixed rate mortgages which means they may not benefit from the drop in borrowing either.

Some lenders have pledged to pass on the most recent interest-rate cut in full to borrowers on mortgages linked to their standard variable rate (SVR). Although many lenders are likely to follow, as they attempt to balance the needs of savers who are feeling short-changed.

Those borrowers who will be celebrating are those who have base rate tracker loans, and they should see their mortgage costs drop in line with the base rate at the end of January. But as a note of caution some lenders have refused to lower their tracker rates any further.

A number of lenders have withdrawn their tracker range for re-pricing. It is anticipated that when they are re-launched, if reductions follow the same path as we witnessed after previous interest rate cuts, new borrowers could benefit from this historic rate cut. Although lenders have become more stringent about whom they accept as new customers, with a 40 per cent deposit typically required to gain access to the cheapest deals.

Nationwide, Halifax and the Council of Mortgage Lenders have all refused to make predictions for house prices falls in 2009. However, other commentators forecast a further fall could be between 10 per cent and 15 per cent.