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Base rate: How low can it go?

by: Melanie Bien
  • 06/06/2012
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Base rate: How low can it go?
Just when we had grown accustomed to interest rates at a record low of 0.5% for months on end, it seems they might just edge lower.

At least, that’s what the International Monetary Fund (IMF) is calling for.

Christine Lagarde, head of the IMF, says that slashing the base rate might boost the economy.

Of course, with rates already at 0.5% there isn’t much room for manoeuvre – the Bank of England could cut by a quarter point or go the whole hog and cut rates to 0%.

While this would incite howls of protest from already-squeezed savers, borrowers on base-rate trackers will be delighted.

However, would it make much difference for borrowers sat on their lender’s SVR? With several lenders increasing their SVRs in the past month despite no move in rates, one suspects many would use any rate cut to improve margins, rather than pass it onto borrowers.

If this happened, there isn’t much borrowers could do apart from vote with their feet and move to another lender. But this assumes they have enough equity in their homes and meet the criteria of a new lender, so are able to do so.

While the surprise drop in the consumer price index to 3% in April from 3.5% in March is encouraging, the economy remains weak.

Several lenders have raised mortgage rates over the past few weeks on the back of higher funding costs, and problems in the Eurozone are likely to encourage more lenders to further rein back on lending.

Further interest rate cuts would be highly unpopular among hard-pressed savers but welcomed by some borrowers. Would it boost the economy? There is only one way to find out.

Melanie Bien is director at Bien Media

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