Interest rate cuts could mean free banking comes to an end

A recent report has suggested that the fact that the base interest rate in the UK is now at a record low, and could even fall further, means that the nation could see free banking services come to an end.

The dramatic cuts in interest rates have been welcomed by some borrowers and industries, but have also resulted in the profits of banks being threatened. Based on this some industry officials have said that if interest rates remain at such low levels free banking services could become a thing of the past in the UK.

In October of last year the base interest rate stood at 5 percent, having already dropped a few of times after reaching highs of 5.75 percent in 2007. However, for the six months from October last year the impending recession, the failing economy, and the growing financial crisis resulted in the Bank of England taking drastic action and cutting the base rate on a monthly basis. It is now down to just 0.5 percent, which is the lowest level in the three hundred and fifteen year history of the Bank of England, and some experts expect it to fall to zero.

Banks are likely to suffer in a number of ways from the dramatic base rate cuts.

Firstly, they usually charge a certain amount above base rate on their borrowing, so in many cases the amount of interest that they are charging will fall as the base rate falls.

Secondly, the rock bottom interest rate means that savers are getting very little in the way of returns on their savings, which means that many may decide that there is no point depositing their money into their savings accounts.

The Building Societies Association has already commented on this problem, stating that the low returns that savers are now getting on their savings means that less money is being deposited, and this is reducing the access that lenders have to cash to finance their mortgage lending activities.

Tags: building societies association, bank of england, interest rates, free banking, savings accounts