On 10th March, the Bank of England unanimously decided to reduce interest rates to bolster the economy amid the coronavirus outbreak. The Monetary Policy Committee made the emergency decision to cut the Base rate from 0.75% to 0.25% to ‘manage through an economic shock’.
So, what does the Base rate cut mean for your finances?
Bank cuts rates in emergency measure
It’s now been more than a decade since the global financial crisis saw interest rates reduced to record lows.
The last increase to borrowing rates was in August 2018 when the Bank of England Base rate rose to 0.75%. Now, the Bank have decided to cut the Base rate by 50 basis points, back to a record low of 0.25%.
With the coronavirus outbreak spreading, the Bank said that the measure was designed to support business and consumer confidence, and reduce the cost and improve the availability of finance.
They added: “Although the disruption arising from Covid-19 could be sharp and large, it should be temporary. The Bank of England’s role is to help UK businesses and households manage through an economic shock. These measures will help to keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm.”
Ten years of record low interest rates have been great news for mortgage borrowers in the UK. It’s now possible to benefit from a fixed or tracker rate mortgage at well under 2% and there is a huge choice of cut-price deals available.
Fierce competition between lenders for new business has also driven down the cost of borrowing. According to financial analysts Moneyfacts, the average cost of a five-year fixed-rate mortgage fell by 0.2% in 2019 alone, from 2.94% to 2.74%.
As the Bank of England has cut interest rates, you could potentially see the cost of borrowing reduce even further. If you’re looking to take out a new mortgage in 2020 then the Base rate cut could well lead to more attractive products, particularly if you’re considering a tracker rate deal that is linked to the Base rate.
If you already have a mortgage, how you are affected by the Base rate cut depends on the type of deal you have:
- Fixed rate – If you are on a fixed-rate deal than the change to the Bank of England Base rate won’t change your monthly repayments
- Tracker rate – If your mortgage is directly linked to the Base rate, then you will see a reduction in your repayments now the rate has been cut. A 0.50% cut in rates would typically see your mortgage rate also reduce by 0.50%
- Variable rate – If your mortgage is linked to your lender’s Standard Variable Rate (SVR) – perhaps because your deal has ended and you’ve reverted to the SVR – then it is possible that your repayments may fall now the Base rate has been cut. Lenders have the discretion to change their SVR as they see fit, although when the Base rate was last cut in 2016 eight of the UK’s top 10 lenders did reduce their SVR by the same amount soon after.
In contrast to mortgage borrowers, savers have endured a difficult decade. Finding an account that paid an interest rate that outstripped inflation has been difficult, and so savers have struggled to make any decent returns in real terms.
Indeed, in late February 2020, just 21 savings accounts out of 968 offered an interest rate that beat inflation, according to Moneyfacts research.
Before the recent cut, easy-access saving rates were at their lowest level for more than two years at an average of around 0.5%.
This is Money report that there is £770 billion in easy-access accounts paying an average of 0.5%. With inflation at 1.8%, this means savers are missing out to the tune of 1.3%, or £10 billion. There is £167 billion in fixed-rate and notice accounts paying an average of 1.1% — 0.7% below inflation.
Now the Base rate has been cut, expect savings rates to fall. Moneyfacts report that, after the Bank of England reduced the Base rate in 2016, the average savings rate for an easy access bank account fell by 0.14% in the ensuing three months.
Generally speaking, a reduction in the Base rate is good news for stock markets as lower interest rates are considered a stimulant for growth.
Lower interest rates make it cheaper for consumers to borrow money, and it also encourages them to spend. Businesses can also borrow more cheaply, enabling them to finance operations, expansions and acquisitions at a cheaper rate. This increases their earnings potential and, in turn, leads to higher share prices.
Many companies, such as utility giants National Grid and SSE, and telecoms firms such as Vodafone or BT, tend to carry high levels of debt on their balance sheets. Lower rates can therefore provide a boost as it reduces their cost of borrowing, making them more profitable.
Get in touch
If you want to know more about the potential impact of the Base rate cut on your finances, please get in touch. Email firstname.lastname@example.org or call (0161) 8080200.
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