Could the Base Rate be in for Another Cut?

by Mark Johnston

The forecast for a rise in the base rate is now further away than at any time since the financial crisis began. Money markets have recently predicted that a rise will not come until at least 2017.

This is in part due to many traders who have deemed that the British economy would be unlikely to cope with a rate rise for years to come.

These views however, conflict with the views of many economists who suggest that rates will start to rise much sooner, they expect rates to return to the ‘normal’ 4% or 5% by 2015.

The Ernst and Young ITEM Club, a group of economists, recently said that they expected the Monetary Policy Committee (MPC) to keep the rates on hold “for at least another year”.

It seems that the problems in the euro zone have been the main catalyst for the re-pricing of rates forecasts.

The cost of borrowing for UK banks has risen sharply due to overseas investors fear that the UK could be exposed if Greece, among other countries, run out of money.

With Greece’s exit from the Euro becoming an increasingly realistic outcome, the Bank of England’s Monetary Policy Committee (MPC) has been building a contingency plan to deal with the knock on effect of this. They have hinted that it could include cutting interest rates to zero.

The International Monetary Fund (IMF) has also called on the bank to do more to stop the economy stagnating by pumping new money in to the economy and cutting the base rate further from it historical low of 0.5%.

Such moves could potentially have big implications for consumers, especially mortgage borrowers.

However, on the mortgage front the only potential borrowers that could benefit from a further base rate cut would be those on tracker deals as they are linked to the base rate, although there still may be a catch as some lenders apply a ‘floor or ‘collar’ to their deals (a rate below which the borrowers pay rate can not fall).

Standard variable deals are highly unlikely to fall as these rates are controlled by the lender.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said “given that several lenders have raised their variable rates recently, many would simply absorb the benefit of any rate cut rather than pass it on to the borrower”.

With the hint of another rate cut David Hollingworth, ofLondonand Country, has warned that anyone looking to currently re-mortgage “should make a decision based purely on their own financial circumstances and not on possible future rates”.

Many financial experts also warned borrowers that the market is volatile and the outlook can change very quickly.

These potential base rate cuts have been met by savers with mixed views, which is no surprise considering that rates for savings are at such low levels after the first base rate cut, some feel it could impact their savings in a positive way, while others hold an opposing view.

Recent research has shown that 3 in 5 savers are against a further cut to the base rate. Of those who took part in this particular research 15% said that the cut should not go ahead as inflation has not yet been brought under control.


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