August 5, 2016 by quiqcleanpro
The Bank of England has cut interest rates from 0.5% to 0.25% – a record low and the first cut since 2009, in a bid to counter the threat of a post-Brexit vote recession.
Here we take a look at some of the potential implications of such a move for homeowners, savers and pensioners, as well as the wider economy.
How will this impact those who have mortgages? That depends on what type of mortgage the homeowner has. Those with fixed-rate mortgages will not benefit from any cut until their deal expires.
For some consumers, that could be as long as five years away. Customers on tracker mortgages, however, will benefit immediately as their mortgage rate is linked to the Bank of England’s base rate.
The reduced rate means that repayments on tracker mortgages will fall as well. More People Keeping Cash Outside Banks. For example, a homeowner has a tracker mortgage of £150,000 over 25 years with a base rate of 2%.
If the interest rates drop to nil, the homeowner’s monthly repayment would drop from £673 to £636.
How does the cut affect those with personal loans and credit cards?
According to the Credit Conditions Review by the Bank of England for the second quarter of the year, the availability of this unsecured credit is at its highest since 2007, when the survey began.
As a result, personal loan rates have fallen markedly over recent years and are currently at an extremely low level.
Personal loan rates are mostly fixed and, therefore, consumers currently repaying such loans will not benefit from a rate cut. Personal loans are not directly linked to actual interest rates but rather to the long-term base rate forecast.
Therefore, the cut in interest rates might not mean an automatic drop in personal loans rates.
However, due to intense competition in the lending market, the loan interest rates might start dropping sooner rather than later.
The same principle applies to the credit cards. The only difference is that credit cards have variable interest rates and, therefore, consumers who currently have credit card debt might see their interest rate change when the base rate moves.
Will a cut help or hinder savers?
Savings rates have fallen sharply this year. According to Moneyfacts, the average easy access account interest rate fell from 0.64% in Jan 16 to 0.56% in July.
The average five-year fixed rate bond fell from 2.63% to just 2%.
This is primarily due to reluctance of providers to compete with each other, as they have access to the cheap wholesale funds and, therefore, they do not need savers’ cash.
When the interest rates drop, it will be even cheaper for banks to borrow from wholesale funds and, therefore, interest rates for savers might drop even further.
How will pensioners be affected by an interest rate cut?
When interest rates are cut, investors might switch their money from cash to bonds or shares, as these will generate higher returns.
This will drive up the prices of shares and bonds, which will benefit those whose pension funds are invested this way.
However, base rate cuts will have a negative effect on pension savers who wish to purchase an annuity, as the annuity rates are directly linked to the yield on 15-year gilts, which are likely to drop.
Will tourism be affected?
Foreign institutional investors bring money to the UK to benefit from the increased interest rates and convert their cash into sterling which they deposit in banks.
When the base rate is cut, investors will choose to invest in different markets offering higher returns, which will drive down the price of the pound.
As a result, the cost of foreign holidays for British tourists will rise.
However, the cheaper pound will attract more overseas tourists to the UK.