Will the rock bottom base rate help homeowners?

Over the past few months the Bank of England has been taking radical action with regards to the base interest rate. With the economy really suffering and heading for recession, and with consumer confidence at really low levels, the central bank was forced to do something to try and ease the difficulties that both consumers and businesses in the UK were facing. To the relief of many industry groups and consumers the Bank of England has taken unprecedented action recently to try and ease the situation, but this does not guarantee that consumers will actually be any better off.

In October of this year the Bank of England reduced the base rate by 0.5 percent one day ahead of the Monetary Policy Committee meeting, where the interest rate movement is normally determined. This brought the base rate down to 4.5 percent, the level it was at before the series of five base rate hikes between August 2006 and July 2007.

Following the Monetary Policy Committee meeting in November, the central bank took the huge step of slashing the base rate by a massive 1.5 percent, taking the interest rate down to just 3 percent. And at the December Monetary Policy Committee meeting the central bank cut the base rate by a further 1 percent, which took the base rate to a fifty seven year low of just 2 percent.

Of course, naturally this news has been welcomed by both consumers and various industry groups. However, there are concerns with regards to whether all consumers will benefit from the recent huge rate cuts, as whilst some banks have passed on the full rate cuts many have passed on very little or even none of the cut, which means that their borrowers will not actually benefit, thus reducing the positive effects on the economy.

After announcing the rate cut the Prime Minister, Gordon Brown, said: “If the banks pass the interest rate reduction on, and I hope and believe that they should do so, then it’s of benefit to homeowners and businesses right across the country.”

Another official said: “There wasn’t quite the shock value of the dramatic one-and-a-half point reduction in November. But we shouldn’t forget the scale of the Bank of England’s action. The cost of borrowing has been more than halved since early October, as the Bank got to grips with the rapid decline in confidence and spending.”

With the base rate now at the lowest level in nearly six decades, many are hoping for some respite from the financial problems that have been rife over the past year or two.

One official said: “You could almost hear the sigh of relief up and down the country. Anything less would have been a missed opportunity. The Bank has given the economy the right medicine at the right time. Manufacturing and services surveys this week have confirmed that the recession is gathering momentum. At the same time, commodity prices have collapsed and inflation is set to fall dramatically, the dire prospect of deflation is becoming more likely.”