Will the UK drop in base rate make any difference to the crisis?
At a meeting of the Bank Of England's monetary policy committee today the 6th of November 2008 the Bank decided to drop bank base rate by a whopping 1.5%. This level of reduction has never been seen before and the new bank base rate of 3% has not been seen in the United Kingdom since 1954.
The question is, will this help both ourselves and the economy, both in the short and long term. I am afraid that my answer to this would have to be no, I can't see it happening. The reason behind this is that the lenders will be unwilling to pass on the 1.5% to the public because they were unable to pass on the previous rate cut either. To put it into perspective, their standard variable rate is still at the level that it was more than 6 months ago, go figure.
The problem that most lending institutions have both here in the UK and around the globe is even though bank base rates have reduced the cost of funds from bank to bank has not fallen at the same rate. The rate at which financial institutions in the UK lend to each other is called the LIBOR rate which stands for the London inter-bank offered rate. Whilst LIBOR has come down very slightly over the last few months it is quite considerably out of sync with bank base rates. So even though money appears to be cheaper it is not.
In light of what is happening with the credit crunch, and also because lenders bad lending books have become transparent and public knowledge, public lenders have become reluctant to lend to one another. This nervousness amongst lenders is what affects the LIBOR rate. Everyone in the finance industry is all too aware at the moment of the bad lending decisions that have been made in recent times, and with credit risk being such a hot topic lenders just aren't prepared to take any more risks.
You would be forgiven for thinking that the cash inputs of various governments over the world may have gone some way to easing the crisis, but you would be sorely mistaken. For some reason there are rumours circulating that a condition of the cash injection is that lenders must lend a set percentage more next year than the previous one, and so they are preparing themselves for that eventuality, but this may only be rumour. What is for sure is that there is very little money about, and as such the rates are very poor.
In my opinion, what the decision of 6th November will do is up the confidence levels of the public. People will come to the natural conclusion that the lowering of base rates means there is light at the end of the tunnel. They will soon realise this isn't so when they see that their mortgage rates have not changed in line with the bank's new rate. The difference may be seen in commercial finance though. Most commercial rates are set at a level above the bank's base rate, so it may reach here.
Irrespective of that, a lot of commercial lenders have bumped up their over base rate level to preempt any new customers looking to borrow. Equally, some lenders have already withdrawn their base rate tracker level or increased it so as to eliminate any possible risk of losing more money. After such a huge single cut in rates, and looking at the action being taken, it makes you wonder if these lenders actually saw it coming!
So what effect are we looking at, if any? Well, to be frank, in the short term we are probably looking at very little change at all. But still we have to believe that over time the positive knock on effects of this drop in the base rate simply have to reach down to the people on the ground. Otherwise we are facing a very bleak financial future indeed.
The question is, will this help both ourselves and the economy, both in the short and long term. I am afraid that my answer to this would have to be no, I can't see it happening. The reason behind this is that the lenders will be unwilling to pass on the 1.5% to the public because they were unable to pass on the previous rate cut either. To put it into perspective, their standard variable rate is still at the level that it was more than 6 months ago, go figure.
The problem that most lending institutions have both here in the UK and around the globe is even though bank base rates have reduced the cost of funds from bank to bank has not fallen at the same rate. The rate at which financial institutions in the UK lend to each other is called the LIBOR rate which stands for the London inter-bank offered rate. Whilst LIBOR has come down very slightly over the last few months it is quite considerably out of sync with bank base rates. So even though money appears to be cheaper it is not.
In light of what is happening with the credit crunch, and also because lenders bad lending books have become transparent and public knowledge, public lenders have become reluctant to lend to one another. This nervousness amongst lenders is what affects the LIBOR rate. Everyone in the finance industry is all too aware at the moment of the bad lending decisions that have been made in recent times, and with credit risk being such a hot topic lenders just aren't prepared to take any more risks.
You would be forgiven for thinking that the cash inputs of various governments over the world may have gone some way to easing the crisis, but you would be sorely mistaken. For some reason there are rumours circulating that a condition of the cash injection is that lenders must lend a set percentage more next year than the previous one, and so they are preparing themselves for that eventuality, but this may only be rumour. What is for sure is that there is very little money about, and as such the rates are very poor.
In my opinion, what the decision of 6th November will do is up the confidence levels of the public. People will come to the natural conclusion that the lowering of base rates means there is light at the end of the tunnel. They will soon realise this isn't so when they see that their mortgage rates have not changed in line with the bank's new rate. The difference may be seen in commercial finance though. Most commercial rates are set at a level above the bank's base rate, so it may reach here.
Irrespective of that, a lot of commercial lenders have bumped up their over base rate level to preempt any new customers looking to borrow. Equally, some lenders have already withdrawn their base rate tracker level or increased it so as to eliminate any possible risk of losing more money. After such a huge single cut in rates, and looking at the action being taken, it makes you wonder if these lenders actually saw it coming!
So what effect are we looking at, if any? Well, to be frank, in the short term we are probably looking at very little change at all. But still we have to believe that over time the positive knock on effects of this drop in the base rate simply have to reach down to the people on the ground. Otherwise we are facing a very bleak financial future indeed.
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posted by Credit Counseling at
12:32 PM
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