Will the rate cut work?
Fraser Nelson 7:31pm
"Interest rates are cut for the first time in two years, so does that mean we can spend more this Christmas?" so runs the headline from Radio One's Newsbeat. As so often, it cuts to the chase. The million dollar question is how will lenders respond to the rate cut? How much clout does the bungling Bank of England have? For most of the last 20 years we have assumed a direct relation: base rate cut means lower mortgages and store-card rates. But after the summer credit crunch, the BoE is losing credibility and clout. "It's been running a 'how not to" guide for monetary policy' as one appalled banker told me last week. The divergence between the LIBOR overnight inter bank lending rates and the BoE base rate suggests something wrong in the relationship. It could well be that the banks ignore the BoE. So no one should celebrate until we see how, and indeed whether, lenders respond. Not that tomorrow's papers will put it quite like that, I suspect.
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Comments
NickL
December 6th, 2007 10:44pmBut as the BBC reported before 4pm, the two biggest lenders had already responded to the base rate cut.
Seasurfer1
December 6th, 2007 11:15pmBanks will not follow Base Rate. Those days are over and the Market Rate will be supreme. Banks are really in trouble with the large bulk of their customers, despite what the latest reporting is saying. Brown will in the early spring have to legislate that Banks give relaxed mortgage holidays and lower rates to clients who are in desperate trouble.
jaytt
December 7th, 2007 1:50am"the two biggest lenders had already responded to the base rate cut." Hm, yes, they said they'd implement the cut 'in full'. That doesn't mean much. The Halifax (for example) will possibly drop their highest SVR rates by 0.25% - but their current 'SVR' (it's really a follow-on rate) is a whacking 7.75%, so they can afford to charge 7.50%. It'll still be more than 1% above the LIBOR rate (assuming that does a 0.25% cut to 6.40%) and 2% above the bank rate at 5.50%. The BoE bank rate is a laugh - not even worth a headline. The smart big lenders have already factored in a high SVR and massive redemption penalties to cushion any reduction in the bank rate. Their low initial rates got the punters in - and even if they are slightly reduced, it'll make no difference. People should think before they sign up. A mortgage is not obligatory. Savers will be shafted as usual.
jaytt
December 7th, 2007 1:53am...and it's all very well giving special help to borrowers who've borrowed too much. Will they in turn give some of their profits back to the more prudent borrowers in 10 years time when their over-geared houses make them more money? I doubt it.
Fraser Nelson
December 7th, 2007 10:41amJaytt and Seasurfer, can you elaborate? The idea that the "days are over" of the BoE directing interest rates is crucial - how far has the BoE lost the ability to control borrowing rates? And do you think this a globalisation thing or a BoE thing?
Simon Cawkwell
December 7th, 2007 6:35pmI think you are mistaken in criticism of the BoE. Their remit has been to control inflation. That has led to the interest rate policy. The days when the BoE controlled aggregate credit are long past. Do you seriously think that the old BoE would have stood idly by whilst average personal debt ballooned from £17,000 to £33,000 this last seven years. Answer: absolutely not. The current level of interest rates and credit facilities are a direct result of Brown's refusal to rein in credit when he was Chancellor. This is nothing whatsoever to do with the BoE. It has everything to do with Brown's desire to bribe the electorate with its own money. At which he has, in a sense, succeeded.