Base rate hits 1.5% – lowest rate since records began
08 January 2009 / by Rachel Mason
The Bank of England’s decision to cut the rate by 0.5 per cent, the fourth consecutive cut since October, when it was 5 per cent, means the base rate is below 2 per cent for the first time in its 315 year history.
The rate hasn’t been raised since July 2007, when it was 5.75 per cent.
The cut should signify good news for people with tracker mortgages, as many lenders, including Lloyds TSB (read: Lloyds TSB tracker mortgage rates could go as low as 0%), have already pledged to pass on the cut in full.
But the cut is a double edged sword – while borrowers benefit from the falling rate, savers – particularly pensioners – are being hit hard.
“Today’s interest rate cut of 0.5 per cent comes as no surprise as the Bank of England and Government try to ease the pressure on households and businesses. However, savers and pensioners are inevitably going to suffer as rates edge even closer to zero,” said James Caldwell, director at Fairinvestment.co.uk
“Savings accounts and ISA rates have already fallen, so this will be another blow to those using interest from investments to supplement their incomes.”
Mr Caldwell says that even though mortgage rates have fallen, lenders are still very reluctant to lend to people unless they have a substantial deposit, warning that until the mortgage market becomes first time buyer friendly, the housing market is unlikely to recover any time soon.
“More pressure should be put on lenders by the Government to relax lending rules as well as reducing interest rates,” he said.
David Kuo, financial expert at Fool.co.uk agrees; “In theory we should be delighted to see interest rates fall to historic lows,” he said, “but the harsh reality is that banks are both unwilling and unable to cut the cost of borrowing further if they are to remain viable.
“It is about time the Government admits that Plan A, namely cutting interest rates alone, is not the solution. In fact, the Monetary Policy Committee is rapidly running out of interest-rate ammunition, and whether interest rates now fall to zero is irrelevant.”
Mortgage lenders too say the rate cuts aren’t enough; “Cuts in the base rate are starting to look futile and even-counter productive,” said Ben Thompson, director of mortgages at Legal & General.
“We have reached the point now where only the fortunate few are really benefiting and savers are really starting to suffer.
“What lenders need more than ever are savers’ deposits, and they are not going to get them if they can only offer paltry rates of interest. It is lack of credit that is hurting the market, and mere rate cuts are not going to help directly.”
© Fair Investment Company Ltd