Tuesday, 22 May 2012

Zero % Interest Rates?

Would the Bank of England cut its base interest rate below 0.5%?

If it did, what would the effect be - or is the idea a red herring?

The notion has resurfaced because the IMF has called on the Bank of England to consider cutting its rate even further.

Here's the possible impact:


People with tracker mortgages are the winners - their monthly payments would be cut. Some borrowers on Standard Variable Rate mortgages would benefit too, if they have a guarantee that the rate won't vary too much from base rate.

New mortgage offers - unlikely to be affected much.

Credit cards, overdrafts, personal loans. All these tend to move independently from base rate.


Sounds like terrible news for people depending on savings interest.

But the best savings rates, around 3% variable, are governed more by competition between banks and building societies - as they try get hold of our cash to give them something to lend out.

So the rates on offer might be affected very little, if at all.

Stretching banks

In fact, the effect of cutting Bank base rate might be to put our beleaguered banks under even more pressure.

They'd have to cut some customers' mortgage payments, but would still have to pay top dollar - or top pound - for savings.

"Their balance sheets would be even more stretched," warns Ray Boulger, mortgage expert at John Charcol.

So...red herring?

The IMF message is bound to prompt discussion at the Bank of England. But that doesn't mean action.

If its Monetary Policy Committee can't see a useful result, they're unlikely to push base rate further down into uncharted depths.

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