Well, the Monetary Policy Committee of the Bank of England did what was expected and reduced the ‘Repo rate’ to 1.00%, a new record in the Bank’s 315 year history. What does that mean for us?

1. If we are lucky enough to have a tracker mortgage, the interest rate payable will fall by a further 0.5% as of the beginning of next month – unless the lender has put a ‘floor’ on the product. That is, a rate below which the mortgage interest rate will not fall.
2. If we have savings, we will receive hardly any money at all
3. If we have a fixed rate there will be no change
4. If we are planning on taking out a new mortgage or refinancing; hardly anything will change.

Most lenders withdrew their tracker and variable rate products in the days leading up to this week’s decision. Once the decision was announced, they started announcing new products with higher margins over the Bank Base Rate. Essentially this means that the mortgage rates are unchanged from before the announcement.

The reasons for this are now well known. Bank Base Rate (or Repo Rate) does not now influence the cost of money to the banks. This cost is driven by how accessible funds are and, with fear still the master of banker’s thinking, money costs the banks at least 1% more than the Bank Rate. Unless and until fear is eliminated, borrowers will not benefit for the Bank of England’s efforts.

• Can you now afford your new home?
• Can you now afford to move to a bigger home?
• Do you have adequate Income Protection?
• What would happen if you lost your job?

Call us on 01752 561981 for a free, no-obligation discussion of your circumstances and we’ll see if we can help you move into that new home and get the right protection.

For further reading:

• http://www.bankofengland.co.uk/monetarypolicy/decisions/decisions09.htm
• http://www.ft.com/cms/s/2/859430e0-f384-11dd-9c4b-0000779fd2ac.html
• http://www.ft.com/cms/s/2/4c92e614-f47f-11dd-8e76-0000779fd2ac.html
• http://www.inthenews.co.uk/news/finance/bank-england-cuts-rates-by-half-point-$1266389.htm
• http://www.cml.org.uk/cml/media/press/2102

On 23rd January, the Government announced, to no-one’s surprise, that the UK was now officially in a recession. Measures taken to drag us out of the recession so far have been to:

• Make additional money available for short-term borrowing by banks so as to ease their funding needs
• Pump thousands of millions of pounds into the Banking sector, buying out debt in exchange for equity in the sector.
• Progressively and aggressively reduce the Bank of England base rate – to stimulate the economy

It is being widely predicted that interest rates will continue to fall to, perhaps, zero with another cut this week. The Chancellor is also talking about “Quantitative Easing”, which the uninitiated might be forgiven for thinking means “printing more money”. Perish the thought!

To date, very little seems to have worked and questions are being asked as to whether the present policy of interest rate reductions can, in fact, be made to work. Interest rates, on their own, seem to be the wrong tool to deal with this problem and, as we near zero, they can have less impact.

The problem is very much that banks are not lending to customers or small businesses. Specialist lenders who filled the gap in previous years are starved of cash and banks are hoarding money in case of a further crisis, thereby exacerbating the current one. Interest rates to customers are increasingly being driven by the banks willingness to lend and not by Government (or Bank of England) policy.

We need a radical re-think on how money makes the economy work. We need to reduce many of the risks banks are carrying so that they will free up their vast reserves and start lending again and at affordable rates. Maybe then we need to print more money so that this can happen. We will also need to remove that money from the economy as soon as possible so as not to stoke up inflation in the future.

The Government had better get this one right, and soon.

• Can you now afford your new home?
• Can you now afford to move to a bigger home?
• Do you have adequate Income Protection?
• What would happen if you lost your job?

Call us on 01752 561981 for a free, no-obligation discussion of your circumstances and we’ll see if we can help you move into that new home and get the right protection.

For further reading:

• http://www.telegraph.co.uk/finance/financetopics/recession/4321414/UK-recession-Its-now-official.html
• http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4362284/Banks-bail-out-package-still-short-on-detail.html
• http://www.cml.org.uk/cml/publications/marketcommentary