Low Interest Rates Helping Households

by Mark Johnston

The bank of England’s monetary policy committee (MPC) cut interest rates in a last ditched attempt to help households and businesses in the economic downturn.

Head of banking at moneysupermarket.com, Kevin Mountford said “The bank of England did not slash the base rate to appease consumers, it was originally done to help kick start the economy.”

It was hoped that low interest rates would reduce the impact and length of the recession and would also ease pressure on cash strapped consumers and businesses.

However it seems that both borrowers and savers alike have been penalised following the base rate cuts. Technically, rate cuts should be good news for borrowers but unfortunately it all depends on the type of loan they have as well as the provider they are with currently.

Director General of the council of mortgage lenders (CML), Michael Coogan stated that not all lenders are the same. “It is not realistic to expect them all to react in the same way to rate cuts.”

Peter Rollings, managing director of Marsh and Parsons estate agents said: “It does not matter how low interest rates go if banks continue to hoard their cash.”

Many lenders have blamed the high cost of inter-bank borrowing for their reluctance to pass on rate cuts to their customers. Some leading analysts agree with this stating that if lenders could borrow money at the bank of England base rate then mortgage rates may be able to lowered. Although in the real world most lenders are obliged to borrow their money from retail savers.

The Bank of England is likely to hold the base rate at its current historic low of 0.5% for the foreseeable future.

The Ernst and Young ITEM club economic forecast group said that interest rates are likely to remain at 0.5% until as late as 2014.

Sir Mervyn King, Governor of the Bank of England defended the monetary policy committee’s decision to keep the base rate on hold at its current 0.5% claiming the decision is necessary to rebuild the economy. Raising interest rates significantly in the aftermath of financial crisis would result in a much weaker economy and further falls in output than have already been seen.

Kevin Mountford, head of the banking at moneysupermarket.com believes the UK at the moment is an “Island of turmoil.”

According to the CML low interest rates have kept the level of UK mortgage arrears and repossessions steady. They state that 9000 homes were repossessed in the second quarter of the year, approximately 100 fewer than in the previous 3 months.

The number of home owners that have lost their properties due to financial difficulties was 7% lower in the first half of 2011, compared with the first half of 2010 and around 28% down on the first half of 2009.

Mixed economic data released recently suggested that the road to recovery for the UK may be long and far from smooth. “It is likely that the economy will go through many more twists and turns over the coming months,” states Howard Archer IHS Global insight economist.

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