Bank rate - What does this affect

phred

The bank rate has been 0.5% for a long time now.
This seems to have little effect on credit card and mortgage rates.
Savings rates, although low, can be found at 4-5% if you try hard enough.
My question is who benefits from the low bank rate and who would suffer or gain if it went up?

Credit-Crunched

phred wrote: »

The bank rate has been 0.5% for a long time now.
This seems to have little effect on credit card and mortgage rates.
Savings rates, although low, can be found at 4-5% if you try hard enough.
My question is who benefits from the low bank rate and who would suffer or gain if it went up?

No effect on mortgage rates, tell that to the people on CAT standard mortgages or people pay 1.5% on their mortgages.

Savers suffer, so pay off as much of your mortgage as you can!

xrjtg

Credit-Crunched wrote: »

Savers suffer, so pay off as much of your mortgage as you can!

This makes no sense for the group of 1.5% mortgage holders that you just mentioned when you can easily get 3% on instant access savings accounts.

Occams_Razor_2

for all intents and purposes it is a reference rate, it has no bearing on the wholesale cost of funds that banks incur.

VT82

It is the rate at which banks can lend to the Bank of England with instant access. It therefore gives a floor to what return they expect to get from their surplus liquidity.

It is used as a reference rate for mortgages, and therefore has a big impact on existing mortgage rates, even if banks just change the margin over this reference for new mortgages as circumstances dictate. Some standard variable rates are also limited to a margin over bank base rate.

There are also savings products which are either directly linked to bank base rate, or have a guarantee saying that they will never be less than a margin above or below bank base rate. This only makes up a small percentage of the market.

The expected future path of bank base rate also affects London Interbank Offered Rates (LIBOR) and swap rates, although these are also affected by market views on credit risk. These have a big impact on savings rates, and fixed rates (both mortgages and savings) respectively.

Masomnia

Large banks that can borrow from the BoE at 0.5% and then lend to you at a much higher rate are the main beneficiaries, I'd say.

Occams_Razor_2

Masomnia wrote: »

Large banks that can borrow from the BoE at 0.5% and then lend to you at a much higher rate are the main beneficiaries, I'd say.

er, umm....

VT82

Masomnia wrote: »

Large banks that can borrow from the BoE at 0.5% and then lend to you at a much higher rate are the main beneficiaries, I'd say.

Banks can't borrow from the BoE at 0.5%, only lend surplus cash to it.

Borrowing from the BoE is only available:
- either in an emergency via the discount window, at extremely penal rates
- or via open market operations, where banks have to pledge collateral such as mortgage assets to borrow, where they pay market rates.

blinko

mortgages up, inflation down (we assume) savings up

Ark_Welder

blinko wrote: »

savings up

(we assume)

purch

Banks can't borrow from the BoE at 0.5%, only lend surplus cash to it.

Have you ever read the Red Book :eek: