Base rate cut to record low: 1.5%

8 January 2009

The Bank of England has cut the base rate of interest to 1.5%, the lowest rate in the Bank’s 315-year history.

While a cut to the base rate had been widely seen as inevitable, there had been much speculation about the size of the cut. Most analysts expected a cut of 0.5% or 0.75%, although a cut of 0.25% had been seen as a possibility – as had a full 1% cut.

“With the exception of people with tracker loans, most borrowers aren’t necessarily directly affected by changes to the base rate,” said a spokesperson for debt management company Gregory Pennington. “What matters to them is whether or not their lenders pass on the cut, offering cheaper loans and mortgages.”

“While some mortgage providers have already promised to pass on the full cut to borrowers on their standard variable rate (SVR) mortgages, others may pass on just some of the cut, or none of it. It’s important to remember that the base rate isn’t the only factor affecting the cost of wholesale funding – and that banks are also reluctant to reduce (by too much) the interest they pay savers on their deposits.”

“People on tracker mortgages, however, are sure to benefit from the full cut, unless their mortgage comes with a collar (also known as a ‘floor’), which means their interest rate won’t fall beyond a certain point.”

Many analysts believe the base rate may fall to zero in the near future.

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