Will The Interest Rate Cut Help?

The size of the cut signals the Bank’s concern that the UK is heading for a long recession, according to the BBC and follows an emergency cut in rates last month from five percent to 4.5%. However, banks are expected to take their time deciding whether to pass on the cut to mortgage holders and savers.

BBC economics editor, Hugh Pym, said, “This cut should help to ease conditions in the credit markets, and allow banks to pass the benefits on to their customers.”

However, some are concerned the cut in the Bank of England’s base rate might not be passed on to other borrowers. Comments prime minister, Gordon Brown, “We want the banks and building societies to pass on the interest rate cuts to their mortgage holders,” he said. “What we’ve been trying to do over the last few weeks is get the liquidity into the system, recapitalise our banks and then get them to resume the lending that is necessary.”

John Wright, national chairman for the Federation of Small Businesses says that the organisation welcomes the rate cut, but now the banks need to respond. “The cut amounts to a generous saving for small firms of £750million on loans and overdrafts. But, this will come to nothing if the banks do not follow through and pass on the rate cuts to those small firms struggling with increased costs of credit,” he spoke out.

The Forum of Private Business (FPB) is also urging the UK’s banks to reduce interest rates in line with the Bank of England’s decision. Phil Orford, chief executive said the decision would boost the confidence of business owners, but only if the banks were pressured to follow suit by passing on the cut in full. “The fact that the cut in interest rates is not being passed on to borrowers and is instead being absorbed into lenders’ profitability means that not only are lenders taking advantage and profiteering, but they are blatantly ignoring all pressure to improve lending provision,” he said.

But, giiven the surprise level of the rate cut, mortgage lenders will take their time to decide whether they will pass on cuts to variable rate mortgage holders, which account for ten percent of total home loans, according to the Council of Mortgage Lenders. The major lenders said rates were “under review,” however Lloyds TSB has promised to pass on the rate cut in full to its variable rate mortgage customers.

Meanwhile, the Institute of Directors said interest rates could touch record lows of two percent or less by this time next year. “The sooner we get interest rates down the less is the risk of a long and deep recession,” said IoD chief economist Graeme Leach.