MSE News: Bank of England cuts base rate to 0.25%

Former_MSE_Steve_1

The Bank of England today cut the base rate for the first time in more than seven years, reducing it from 0.5% to a new historic low of 0.25%...

Read the full story:
'Bank of England cuts base rate to 0.25% – what it means for you'

Click reply below to discuss. If you haven’t already, join the forum to reply. If you aren’t sure how it all works, read our New to Forum? Intro Guide.

Smudge's_Lot

I do not understand why the BoE thinks cutting rates by 0.25% will encourage more businesses and individuals to borrow more and spend more when you can almost certainly guarantee that not 1 bank wil reduce their SVR rates, their personal loan figures or their credit card rates, even if they did, it's only 0.25%!!!!
I will admit to being thick, but what will this actually do, apart from increase the profit maigins to all...oh, BANKS!:mad:

Ed-1

MSE_Steve wrote: »

The Bank of England today cut the base rate for the first time in more than seven years, reducing it from 0.5% to a new historic low of 0.25%...

Read the full story:
'Bank of England cuts base rate to 0.25% - what it means for you'

Click reply below to discuss. If you haven’t already, join the forum to reply. If you aren’t sure how it all works, read our New to Forum? Intro Guide.

What does the base rate cut mean for student loan repayments?

One lesser-known impact of today's rate cut is that it means some graduates will [STRIKE]pay less back on their student loan each month from September[/STRIKE].

Correction: One lesser-known impact of today's rate cut is that it means some graduates will pay less back on their student loan in total - but only if they repay the full loan within the repayment period, as interest rates on income-contingent student loans do not change monthly repayments which are solely determined by a borrower's income.

jamesd

The annuity changes are probably irrelevant for most people who want a secure income for life. Deferring the state pension already pays something like twice what a comparable annuity increasing with inflation would pay a person in normal good health at around state pension age. It's usually trivial to put a defined contribution pension into drawdown and use the money to replace the state pension during deferral.

Best thing to do is just tell people not to throw away half of their money by buying an annuity unless something makes state pension deferral unavailable or inappropriate.

HL doesn't make money from telling people not to waste their money on an annuity and neither they nor any other annuity vendor are required to tell people about state pension deferral. So they continue to sell them to suckers who don't know any better, as well as those who they really are appropriate for.

The text "It's only when you actually cash in your pension that you'll be affected by changes to annuity rates" is pretty lamentable. For the last ten years since Alternatively Secured Pensions were introduced it has not been necessary to buy an annuity when cashing in a defined contribution pension. Reinforcing the already long obsolete idea that you have to buy an annuity when cashing in a pension is unhelpful to anyone interested in getting the best income for their money.

jamesd

"Credit card interest rates are unlikely to move following the base rate cut" will be true for most but far from all of the customers of the UK's largest credit card provider, Barclaycard:

"your interest rates will start to move in line with any changes to the Bank of England Base Rate.

What happens when the Bank of England Base Rate moves?

When the Bank of England Base Rate moves up or down, your standard and cash rates (the interest rates we charge on purchases and cash withdrawals) will also move up or down by the same amount.

If the Bank of England Base Rate does move after 1 February, we'll change your interest rates the day after your next monthly statement date. We put together your statement on the <censored for MSE>th working day of every month and you can also see it online.

What a change might mean to you

As an example, let's say the Bank of England Base Rate goes up by 0.25%. You'll then pay 21p a month more in interest for every £1,000 of your balance. This doesn't include your promotional balances as they aren't affected by Bank of England Base Rate changes."

This may not apply to all of their card products but does apply to the two different card products I have with them.

jamesd

Smudge's_Lot wrote: »

what will this actually do, apart from increase the profit maigins to all...oh, BANKS!:mad:

Cuts to Bank Rate (the proper name for base rate) at the sort of levels we're at today don't increase bank profit margins, they reduce them.

The reduced profit margins would cause banks to be more reluctant to lend. To try to counter that potential the measures announced today include the introduction of the Term Funding Scheme for banks that should help to maintain their margins by letting them borrow from the BoE at close to Bank Rate.

Smudge's_Lot

Jamesd, I am afraid I disagree, with the Bank rate at 0.5% for the last 7 years, the cheapest personal loan is still at approx 3.3%, a 2.8% markup, not even get me started on SVR mark up rates, agreed,not all pure profit, but still way above the Bank Rate, So, now a cut to 0.25%, do you really think any personal loans will come to say 3%...no.
QE has been in place for a long time now, the cheap loans that the banks get from the BoE which has meant that the banks have not had to offer reasonable interest rates to savers as they can just borow the money from HMG, so once again, its not the individuals or businesses being able to access that cheap money, just the banks, which at loan rates of 2-3% are still making profits, so a 0.25% cut will only surely increase profit margins. Once I see all SVRs and personal loan rates come down by the full 0.25%, I might be more convinced

jamesd

What I wrote is also what the governor of the Bank of England said during his press conference about the change and the BoE gave part of that reasoning in the text of its announcement:

"The cut in Bank Rate will lower borrowing costs for households and businesses. However, as interest rates are close to zero, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn might limit their ability to cut their lending rates. In order to mitigate this, the MPC is launching a Term Funding Scheme (TFS) that will provide funding for banks at interest rates close to Bank Rate. This monetary policy action should help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that households and firms benefit from the MPC’s actions."

I don't know whether it will work but the margins are reduced by cuts at this level of interest rates and other countries have found that this caused banks not to be willing to track the rate down. Too soon to know whether what the BoE has done will case banks here to follow or not but a couple of my cards and my mortgage are required to do so by their contracts.

If you don't believe the governor of the BoE you might want to read these press reports about the reduced bank margins from cuts in Australia and India then coverage of the UK change:

Base rate cut by banks to impact margins by 10-15 bps
Rate cut gives bank margins another squeeze

Carney tells UK banks to pass on rate cut:

"The Bank of England governor has told banks they have “no excuse” not to pass on the cut in interest rates to customers. ... However, the rate cut means banks face pressure on their profits, and the move could stoke tension with the lenders. ... Low interest rates weigh on banks’ returns by reducing the amount of interest they receive from lending. Analysts at Citi estimate that a 0.25 per cent rate cut will hit large UK bank earnings by an initial 2-3 per cent, and HSBC, which is more global, by 1 per cent. ... HSBC said in its results on Wednesday that it would take a $200m annual hit if rates were cut to 0.25 per cent. ... To alleviate the pain of lower interest on mortgages, banks could reduce the rates they pay depositors. However, many banks are already paying savers close to zero and have little room to cut rates further."

As that FT story notes, the margin reduction comes in part from the difficulty of lowering a zero or near zero interest rate paid to savers when trying to track the BoE down for lending.

phillw

Smudge's_Lot wrote: »

I do not understand why the BoE thinks cutting rates by 0.25% will encourage more businesses and individuals to borrow more and spend more when you can almost certainly guarantee that not 1 bank wil reduce their SVR rates, their personal loan figures or their credit card rates, even if they did, it's only 0.25%!!!!
I will admit to being thick, but what will this actually do, apart from increase the profit maigins to all...oh, BANKS!:mad:

BoE are putting pressure on the banks to do that and most of them seem to be going along with it. Even though most banks don't fund their loans from deposits and their borrowing costs aren't linked to BoE base rate.

It is only 0.25% but then there isn't much further that they could go. Like anything in the financial market, it's not so much about the actual effect it will have but the perceived up front effect.

It may not be anything to do with borrowing, they probably want people to move their money to more risky investments by eroding any return on safe investments.

Pincher

It's a placebo. It doesn't do anything, but makes you feel safe.
You think "they" are doing something, so you don't panic, take all your money out, and move to America.

If I could put up with all the discipline, I would move to Switzerland.
I still can't work out how you are supposed to leave your bin out for collection, and then take them back in right away. How can you go to work?

AnnaDanishek

One more thing - property prices will likely rise because of 1) lower mortgage repayments 2) the pound's drop will incentivise many foreigners to invest 3) stable demand and permanent housing shortfall in the UK. House prices will likely increase by 2% by the end of 2016 and further in the future (go to https://tranio.com/united-kingdom/analytics/the-bank-of-englands-base-interest-rate-drop-what-to-expect-in-the-real-estate-market_5177/)