Interest rates and other financial news

The UK Government has announced a package of measures aimed at easing the global credit crunch, and in a coordinated move with other central banks, the Bank of England cut interest rates by 0.5%.

The cut in interest rates to 4.5% is the first change for six months, and is the lowest point since July 2006. Lloyds TSB, Halifax and Woolwich were quick to announce they would pass on the full benefit to borrowers.

The reduction in base rate will be welcomed by those on a base rate tracker deal, although borrowers linked to their lenders standard variable rate, now face an anxious wait to see what benefit their lender will pass on.

The package, which could add up to £500 billion, is aimed at kick starting the banking system and includes £50 billion available to banks in return for shares, which the Government would sell when things return to normal, and possibly at a profit. The Government will also act as a guarantor in up to £250 billion in short term loans, in an effort to encourage banks to lend to each other more readily. Many of the UK’s leading banks have already signed up to the deal including Abbey, HBoS, and Lloyds TSB.

The deal is not all one way however, and the banks must play their part. In return for the Government help, the banks must sign up to an FSA agreement on executive pay and dividends.

This comes the day after the Icelandic bank Landsbanki was nationalised, their UK subsidiary placed into administration and their internet bank Icesave closed. With serious questions being asked about the Icelandic compensation scheme being able to fulfil their obligations, the UK Government stepped in and has guaranteed UK savers deposits held with both Landsbanki and Kaupthing (which also saw it’s UK banking group put into administration), which amount to more than £3 billion.

Subsequently ING Direct agreed to take over UK customer deposits with Kaupthing Edge, the online arm of Iceland's biggest bank, as well as savings held with Heritable Bank, which was run by Landsbanki.

The UK government now plan to take legal action against Iceland to reclaim cash from its compensation scheme. Alistair Darling said on the BBC’s Today program that he had spoken to Icelandic government who had told him they had no intention of paying UK savers money back.

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