Will the UK drop in base rate make any difference to the crisis?
On the 6th of November, an unprecedented meeting took place involving the Bank of England's monetary policy committee. At that meeting the bank decided to drop their interest rates by a huge 1.5%, bringing interest the interest rate to the lowest level seen since 1954. The rate currently sits at 3%.
The question is, will this help both ourselves and the economy, both in the short and long term. I am afraid that my answer to this would have to be no, I can't see it happening. The reason behind this is that the lenders will be unwilling to pass on the 1.5% to the public because they were unable to pass on the previous rate cut either. To put it into perspective, their standard variable rate is still at the level that it was more than 6 months ago, go figure.
The main difficulty, not only in the UK but worldwide, is that although the banks have dropped their base rate, the cost of lending from bank to bank has stayed the same. The name used for the rate at which UK financers lend to each other is the LIBOR rate. This acronym stands for the London Inter-Bank Offer Rate. The LIBOR rate has come down very slightly over the last few months, but nothing like the way the base rate has plummeted, so money, although it seems cheaper, still costs almost the same.
In light of what is happening with the credit crunch, and also because lenders bad lending books have become transparent and public knowledge, public lenders have become reluctant to lend to one another. This nervousness amongst lenders is what affects the LIBOR rate. Everyone in the finance industry is all too aware at the moment of the bad lending decisions that have been made in recent times, and with credit risk being such a hot topic lenders just aren't prepared to take any more risks.
You might have thought that the huge injection of capital from governments both here and abroad would have oiled the system but let me tell you this is far from the case. I am unsure why, there are rumors that lenders have been told that as a condition of the injection they have to lend a set percentage more next year than this year and as such they are saving themselves for that mandatory position but who knows. All I know is there is very little money out there, what is there is at low loan to values and the rates are poor.
I personally think that todays decision will have the effect of boosting consumer confidence, people will think that low base rates can only mean things are going to get better. That said they will soon realise this may not actually be the case, especially if their particular lender does not pass that increase on to them within their own mortgage. That said commercial finance should get cheaper as most commercial finance deals are based as a percentage over base rates so any deals that have been done in the past will benefit from this cut.
Irrespective of that, a lot of commercial lenders have bumped up their over base rate level to preempt any new customers looking to borrow. Equally, some lenders have already withdrawn their base rate tracker level or increased it so as to eliminate any possible risk of losing more money. After such a huge single cut in rates, and looking at the action being taken, it makes you wonder if these lenders actually saw it coming!
So in short will it have any effect? Well may be not in the short term but I would like to think may be even hope that over the coming months this recent reduction will find its way to the pumps as it were. If it doesn't and doesn't soon then all I can say is in the immortal words of Dads Army, We're all doomed, doomed I tell you. Let's hope not hey?
The question is, will this help both ourselves and the economy, both in the short and long term. I am afraid that my answer to this would have to be no, I can't see it happening. The reason behind this is that the lenders will be unwilling to pass on the 1.5% to the public because they were unable to pass on the previous rate cut either. To put it into perspective, their standard variable rate is still at the level that it was more than 6 months ago, go figure.
The main difficulty, not only in the UK but worldwide, is that although the banks have dropped their base rate, the cost of lending from bank to bank has stayed the same. The name used for the rate at which UK financers lend to each other is the LIBOR rate. This acronym stands for the London Inter-Bank Offer Rate. The LIBOR rate has come down very slightly over the last few months, but nothing like the way the base rate has plummeted, so money, although it seems cheaper, still costs almost the same.
In light of what is happening with the credit crunch, and also because lenders bad lending books have become transparent and public knowledge, public lenders have become reluctant to lend to one another. This nervousness amongst lenders is what affects the LIBOR rate. Everyone in the finance industry is all too aware at the moment of the bad lending decisions that have been made in recent times, and with credit risk being such a hot topic lenders just aren't prepared to take any more risks.
You might have thought that the huge injection of capital from governments both here and abroad would have oiled the system but let me tell you this is far from the case. I am unsure why, there are rumors that lenders have been told that as a condition of the injection they have to lend a set percentage more next year than this year and as such they are saving themselves for that mandatory position but who knows. All I know is there is very little money out there, what is there is at low loan to values and the rates are poor.
I personally think that todays decision will have the effect of boosting consumer confidence, people will think that low base rates can only mean things are going to get better. That said they will soon realise this may not actually be the case, especially if their particular lender does not pass that increase on to them within their own mortgage. That said commercial finance should get cheaper as most commercial finance deals are based as a percentage over base rates so any deals that have been done in the past will benefit from this cut.
Irrespective of that, a lot of commercial lenders have bumped up their over base rate level to preempt any new customers looking to borrow. Equally, some lenders have already withdrawn their base rate tracker level or increased it so as to eliminate any possible risk of losing more money. After such a huge single cut in rates, and looking at the action being taken, it makes you wonder if these lenders actually saw it coming!
So in short will it have any effect? Well may be not in the short term but I would like to think may be even hope that over the coming months this recent reduction will find its way to the pumps as it were. If it doesn't and doesn't soon then all I can say is in the immortal words of Dads Army, We're all doomed, doomed I tell you. Let's hope not hey?
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