Bank of England Reduces Rates

Published: January 08, 2009

The Bank of England has today announced a reduction in the base lending rate of 0.5%, moving the Bank of England base rate to 1.5%. The cut today takes the base rate to the lowest level in the history of the Bank of England, which spans some 314 years. Lloyds TSB and its subsidiary the Cheltenham & Gloucester have already confirmed that they will pass on the rate cut to existing customers on variable and tracker rate mortgages. Nationwide has also confirmed that it will pass the cut on to customers on its Standard Variable Rate, but not to those on tracker mortgages with collar clauses in their contracts.

The news has met with a mixed reception, with David Kern, chief economist at the British Chambers of Commerce stating:

"British business is disappointed by the MPC's decision to cut interest rates by just 0.5%. We believe it is an inadequate reaction to the rapid worsening in economic circumstances.

"The recent downward revision in GDP figures, coupled with further unemployment increases and rapid declines in house prices, justified a full 1% cut in rates, in line with the BCC's recommendations.

"The outlook is dire, and the MPC must act forcefully. In order to ensure that the economy does not slide into a prolonged depression, we urge the MPC to reduce interest rates to almost zero in the next few months. It must also supplement lower interest rates with vigorous quantitative easing."

However, Robert Sinclair, director of The Association of Mortgage Intermediaries, says:

“In reality the reduction in the base rate is now unlikely to have the desired effect, as this will not be fully passed on by lenders and is simply likely to damage savers further.

“It is vital that this does not distract from the real issue of a lack of liquidity in the mortgage market. Banks continue to be constrained by increasing capital requirements rather than being universally encouraged to support the wider economy.”

It is thought that the government may well have to look at alternatives to get the flow of credit moving again, and this might well include quantative easing, or to put it another way, printing more money. The difficulty with quantative easing is that there is a very real risk that it could be overdone, with economists believing it could lead to run-away inflation in a few years time. If this were to happen, it is likely that interest rates would have to increase substantially to bring inflation back under control.