So the question we should all be asking now is. "What does the Bank of England know that needed such drastic action?" They are normally such a cautious institute that has a history of % cuts and increases. We know that millions of families are struggling, unemployment is rising and will soon reach 2 million, the manufacturing industry is on its knees with the lowest sales, companies are implementing a three day week and Christmas spending is looking like a wash out. I believe they saw an economy on its knees and close to slipping into a deep recession.
The drop in interest rates were to stimulate our economy and yes it may do that; if the banks pass the interest rate cuts on in their entirety to the mortgage borrowers. A 1% interest rate cut to a homeowner with a 100,000 mortgage would reduce their mortgage payment by 125 per month. Unfortunately this will only help borrowers on a standard variable rate, tracker or discount rate mortgage that is linked to the Bank of England base rate. It will not help anyone with a fixed rate mortgage. It is hoped that this interest rate cut will encourage us to start spending in the shops and that should get the economy moving again.
The banks need their interbank lending rate known as the Libor rate to reduce so that banks can start to borrow money from each other. The libor rate is still far too high. The banks need to reduce their libor rates so they can start offering better remortgage deals. There are millions of homeowners who are desperate to remortgage to a better rate. Homeowners looking for a new remortgage product should watch out for banks offering mortgages products with large arrangement fees. It might be better to consider a mortgage product with a higher interest rate and a lower arrangement fee; than a lower interest rate with a higher arrangement fee. Consider using a mortgage broker to find the best remortgage product to suit your circumstances that saves you real money. Latest news is that the Libor rate has just fallen by over 1% to 4.49% on the back of the Bank of England's decision yesterday - there is hope!
The decision by the Bank of England is not welcome by everyone, especially savers and pensioners. They rely on their savings for an income to live and this interest rate cut has reduced their incomes by 33%. This will hurt savers that are pensioners more than anyone else as they live off their savings and do not have a job to support themselves. Most of these people have saved all their lives and now when they need a decent income in their retirement the Bank of England hits them the hardest.
So what is the answer? Well if we let inflation take over we will have everyone asking for bigger annual pay increases; mortgage rates will rise and the people who save money will get higher returns on their money invested. To see the consequences of a country that has been ravished by inflation you only need to look at Zimbabwe where they have major monetary problems caused through politics. Their inflation rate has risen to a staggering 100,000% and a loaf of bread now costs 16 million Zimbabwe dollars. They actually have 50, 100, 200 and 250 million dollar bank notes. A $50 million dollar bank notes is enough for three loaves of bread. Scary isn't it!
We must hope that the Bank of England has seen something in their crystal ball and that they have taken the correct action - there will always be winners and losers. Time will tell whether the Bank of England has made the right decisions.