1% - Bank goes for broke and slashes interest rates by 0.5% to a new record low
Interest rates were slashed to a new historic low of 1 per cent today as the Bank of England took more drastic action to try and stave off the effects of a long and painful recession.
Almost immediately four of the UK’s biggest mortgage lenders said they would be passing on the 0.5 per cent cut in full to their variable rate customers.
Lloyds TSB, which also lends under the Cheltenham & Gloucester brand, Nationwide, Halifax and the Woolwich are all reducing their standard variable rate (SVR) by 0.5 per cent.
But for the nation’s savers, the impact of falling interest rates is devastating as interest rates continue to plunge.
Experts warned that if lenders do not pass today’s cut on then the decision is nothing more than an extra burden for savers who have seen the interest paid on their money dwindle to almost zero.
Some accounts are already paying dire rates of interest as low as 0.001 per cent.
The comparison website Uswitch.com said savers are being ‘punished’ by a ‘plethora’ of rate cuts.
Following the base rate reduction, HSBC launched a new two-year fixed rate mortgage at 2.99 per cent.
The deal, which is available from tomorrow until February 28 at the latest, can be taken out by people with at least a 40 per cent deposit, and it comes with a £599 arrangement fee.
For those on an interest-only mortgage today’s rate cut will mean they have to pay out even less every month.
Cheltenham & Gloucester customers who took out a deal at 1.01 percentage points below the Bank’s base rate will now be paying no interest at all.
For technical reasons, they will still have to make payments - 8p a month for a £100,000 loan - but the money will be refunded.
Those with repayment mortgages will need to pay around £333 a month on the same-sized loan.
Peter Bolton King, chief executive of the National Association of Estate Agents, warned that the cut would do little to help the housing market unless lenders passed it on.
He said: ‘Interest rates are becoming a distraction for consumers and business alike. A cut does not help househunters if major lenders do not pass it on - it simply increases the pain for savers.’
Michael Coogan, director general of the Council of Mortgage Lenders, said: ‘While borrowers on tracker rates will welcome the rate cut, it is doubtful whether it will create the conditions to achieve significantly more new lending.
‘It will not be a surprise if banks and building societies try to prioritise savers in this very low interest rate environment.’
But he added that if the rate cut helped businesses, and therefore helped to keep people employed, this would help to cushion the impact of the recession on the housing and mortgage markets.
Less than 30 per cent of lenders passed on last month’s half-point cut, according to the financial information firm Moneyfacts’s research.
There is better news for the majority of customers with tracker mortgages, as these should automatically fall in line with today’s reduction.
However, around 300,000 customers with these deals will not benefit from the cut, as so-called collars have already kicked in on their loans, so the rate they pay cannot fall any further.
Nicholas Leeming, director of propertyfinder.com, said: ‘Today’s rate cut will have a limited impact on lucky homeowners locked into tracker mortgages.
‘Effective interest rates are no longer being set by Threadneedle Street, but by the boards of the major banks, and thousands of home owners and first time buyers who are champing at the bit to take advantage of lower house prices, will continue to be held back by lack of mortgage availability.’
Today’s announcement marks the first decision from Bank of England policymakers since the UK recession was officially confirmed.
An International Monetary Fund (IMF) forecast that Britain would suffer worse than all other advanced nations in the worst global slump since the Second World War.
Economists predict a bolder strategy from the Bank in coming months, raising the possibility of so-called quantitative easing - or printing money -to increase the supply of money in the economy to buy assets from banks.
Minutes from the last MPC meeting revealed the committee had considered the possibility of leaving rates unchanged in January amid fears about the fall in the value of sterling and to allow previous measures to take effect.
But analysts believe the news this month that the economy shrank by a shock 1.5 per cent in the fourth quarter of last year - the biggest contraction in almost 30 years - has left rate-cutters with little option but to cut rates again.
Governor Mervyn King has said that policymakers might need to use “unconventional” tools to bring inflation back in line with the 2 per cent target.
The official measure of inflation, the Consumer Prices Index (CPI), plunged by the biggest amount since records began in December, down from 4.1 per cent to 3.1 per cent.