Wednesday, 20 June 2012

Cut in Bank Rate "under review"

The country's benchmark interest rate is "under review", after the Bank of England's Monetary Policy Committee (MPC) considered cutting it from the current historic low of 0.5%.

Nothing is happening for "the present time", but it is significant that the Bank has shifted from its previous view that a further cut in rates, recently suggested by the IMF, could backfire.

It's worrying news for savers, who are already suffering from very low rates on the nest eggs - but potentially helpful for millions of homeowners on tracker mortgages (which track Bank rate), who would see a cut in monthly payments.

Here's the meat of what the MPC discussed during its meeting on 6-7th June:

"In March 2009, the Committee had judged that a reduction in Bank Rate below 0.5% could have counterproductive consequences, in particular constraining some banks’ and building societies’ ability to lend.

Lenders were, in practice, unable to reduce deposit rates below zero.  But they had assets – primarily mortgages – with interest payments contractually linked to Bank Rate. Consequently, a reduction of Bank Rate below 0.5% might squeeze some lenders’ interest margins to such an extent that they became even less able to extend new credit.

On the one hand, there was some evidence that the proportion of outstanding mortgages contractually linked to Bank Rate had increased since early 2009, as a number of borrowers’ fixed rate deals had expired and they had moved to paying pre-set rates linked to Bank Rate.

On the other hand, since early 2009, retail deposit rates had increased somewhat.

So it was possible that lenders had greater scope than before to absorb a reduction in Bank Rate by cutting deposit rates without adverse cash-flow onsequences.  The extent to which this would be possible would depend on whether other funding costs also fell in line with Bank Rate.  In addition to this, it was possible that, were interest rates to fall further, the functioning of the money markets would become impaired.

Overall, the Committee judged that, at the present time, a further reduction in Bank Rate would not have any advantages over an expansion of the asset purchase programme, though it would keep the position under review."

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