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Bank of England cuts base rate – bad news for savers, good news for borrowers?

The all time low base rate of 0.5% has just gone even lower, which could see borrowers enjoy cheaper rates, but savers are set to suffer from worse returns

Bank of England cuts base rate to 0.25%

The Bank of England (BoE) has made the historic decision to cut the base rate of interest to an all time low of 0.25%.

This decision comes as an attempt to provide stimulus to the flagging UK economy that has been suffering from falling business confidence since the result of the Brexit vote on 24 June 2016.

The Monetary Policy Committee consisting of nine of the banks economists and senior leaders, including Governor Mark Carney (pictured), voted unanimously for the rate cut.

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What is the base rate of interest?

The base rate of interest is the ‘price’ of money that high-street banks can buy money for, it is a strong influence on the money markets and very much sets the market pace for interest rates available to the public.

So when the base rate falls, mortgage and loan rates also fall becoming cheaper. However, the same is true of savings rates which become less lucrative.

Generally a cut to the base rate encourages people to spend and a rise encourages saving. The BoE use the base rate to meet their annual inflation target of 2%.

Why cut the rate now?

The base rate has been at historic lows since 2009 and while a rate rise had been continually deferred, it was expected sometime in early 2017.

However, after the Brexit vote Governor Mark Carney had hinted that a rate cut might become necessary if the economy reacted as the bank expected prior to the vote.

The report from the BoE stated the outlook for growth “has weakened markedly” following the United Kingdom’s vote to leave the European Union, continuing to say “recent surveys of business activity, confidence and optimism suggest that the United Kingdom is likely to see little growth in GDP in the second half of this year.”

The BoE expect that “the cut in Bank Rate will lower borrowing costs for households and businesses”.

Governor Mark Carney stated “the banks have no excuse not to pass this rate cut on. They should write to their customers and make that clear.”

Bad news for savers?

Interest rates for savings accounts and ISAs had already been suffering before the BoE cut the base rate, with many offering rates lower than 1%.

But there was hope for savers with high interest current accounts offering rates as high as 5% (with certain limitations).

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These accounts were especially welcome given the previous Chancellor’s decision to take the first £1,000 of interest earned annually out of tax (£500 for high rate tax payers) that came into effect in April 2016.

Santander’s 123 account offers up to 3% interest on balances up to £20,000 and is one of the market leaders for high interest current accounts.

But, after the BoE decision Santander have announced they will be “reviewing” this lucrative account. Reza Attar-Zadeh, Head of Retail Products at Santander said:

“Given changing market conditions, including the market expectation that interest rates will be lower for longer, we’ll also be reviewing our current accounts.”

Negative interest rates in the future?

NatWest have discussed plans to make interest rates negative for their business accounts, where savers will have to pay to deposit their money.

Negative rates are by no means unprecedented, Japan and Switzerland have flirted with negative base rates in the past as a means of encouraging growth in their flagging economies.

But while Governor Mark Carney has said there is further room for manoeuvre with the base rate of interest, it’s unlikely to go below 0%.

Good news for borrowers?

Mortgage and loan rates had been becoming cheaper and credit card 0% periods becoming longer over the course of 2016.

Mortgage rates under 1% have appeared and it’s even possible to fix a mortgage rate of 0.99% for two years.

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Also, in an unprecedented move for the mortgage market, some of the lowest fixed rates are now lower than the market leading variable rates. This could be a sign that lenders expect the low rates are here to stay.

Mark Carney stated:

“Half of all mortgages are on floating rates, as are four-fifths of bank loans, so the cut in interest rates will be felt immediately.”