The Bank of England reduced its lending rate by 0.5% to 1.5% today, the lowest level for 300 years. The move will be good news for the estimated 6 million borrowers on variable rates should lenders decide to pass it on.
Both C&G and Nationwide had already announced that they would pass on any reduction, but the announcement from Nationwide, was muted by the plan to invoke mortgage collars, having waived them following last months cut in bank rate.
The announcement from the Bank of England comes amid mounting calls for the Government to take alternative action, as rate cuts alone are not enough to restart the economy. Some experts are calling for the Government to encourage banks to lend more by introducing measures such as guaranteeing the banks debts or buying up bad debts, in an effort to free up cash.
The Chancellor said he is looking at “a range of measures” to increase the supply of money to the economy, with some suggesting this would include quantitative easing. This is where the Bank of England issues cheques to banks in exchange for assets in the hope that they lend the extra money to consumers, who in turn spend it, so stimulating the economy. The US already intends to employ this tactic.
In advance of the Bank’s announcement, the Council of Mortgage Lenders warned that borrowers with standard variable rate mortgages should not expect any cut in bank rate to be passed on, as “there will not be an instant equivalent reduction in the cost of funds to lenders”. Lenders' borrowing costs are not determined by the Bank rate alone, but include what they need to pay savers to attract deposits and the rate other institutions and the money markets will lend at. As savings rates fall there will be less incentive for savers to invest their money and, in turn, less money to re-lend out to mortgage customers.