BoE base rate who pays it.

chappers

This evening in the pub I was chatting with a mate and he said he couldn't understand how the BoE interest rates were going down but mortgage rates were going up. In our increasing alcohol fueled discussion I think I did a pretty good job of explaining to him the "credit crunch" and how it affected inter bank lending and therefore the affect on mortgage rates.
Also explained how interest rates affected the economy how they were related to inflation and spending etc.
Then he asked why was the BoE base rate so important then and who was it apply to .ie: who actually borrowed money at those rates.
At this point I admitted i didn't know.
Can anyone explain this and also who can borrow money from the BoE at these rates and if banks borrow from each other based on the LIBOR, why are some of their products linked to the BoE base rate.

Cheers
Gareth

minimike2

BoE trackers are just one type of product lenders offer. It doesnt dictate thier product pricing though - the margin above / below the BoE rate will be dictated by the cost of the money to them, or how much they want to make off it and that margin can be anything they want it to be!

jamesd

Banks can borrow from the BoE at the base rate for overnight and short term money. BoE tries to keep short term rates at LIBOR in sync with its base rate via that short term lending to banks.

If short term LIBOR is significantly above BoE it means that either there wasn't enough overnight/short term money from the BoE or that banks either don't trust each other and others borrowing via LIBOR or want a greater interest rate margin to pay for their risk in relending the BoE money.

LIBOR rates are a significant factor in the rates asked for variable rate mortgages.