1.5% Base rate cut…who saw that coming?!

Friday, 7th November 2008 10:46 - by Resident IFA

Not me. I was sold on a 1% drop, but not a 150 basis point drop to blow away the cobwebs. The Bank of England (BoE) is perceived as a cautious body, not prone to dramatic action. This changes that, painting them as very committed to aiding recovery in the UK economy, losing their inhibitions by not taking half-measures. Drastic times call for drastic action, the ‘Base rate’ now being at the lowest since 1954/5. The BoE seem to feel they have inflation under control, one commentator actually claiming we will be in a deflationary situation at -1% in early 2009. Let’s hope this rate cut can oil the wheels of lending a little. The 1-week London Inter-Bank Offered Rate (LIBOR) has fallen from 4.96% on October 7th to 4% yesterday in anticipation of the cut (albeit a lesser one), only one month later. This makes little difference, however, if the base rate cut and resultant LIBOR improvement are not passed onto businesses and consumers looking to borrow afresh or re-finance existing loans. Another positive effect today appears to be that the Sterling exchange rate has improved, when such a rate cut usually tends to de-value it in relation to other currencies. Rather than the usual flight to equities from cash as a result of falling returns, it seems that the recent currency falls effectively took account of the bad news ongoing and to come, thus cushioning the blow. So, if anything, the bold rate cut has emboldened and supported the Pound. I have said before that hard times call for brave decisions and the Bank of England rate cut appears to be just such an example. Whether it is enough to help somewhat minimise the prediction that, of all the European and Global nations, the UK is expected to suffer the deepest, most far-reaching, painful recession, only time will tell. On a slightly cheerier note, I had to cancel an appointment with a Client last night to discuss their re-mortgage. Hats off to Coventry Building Society, as this particular product has a ‘revert-to’ interest rate of the Bank of England base rate +0.75%, rather than a lot of lenders who simply move their Clients to their Standard Variable Rate of interest (SVR). Of course, this means they will be paying (if the rate stays the same between now and then) 3.75% come January. As Del Boy would say…trific! Until next time…