Interest rate cut: “YEAHHHHH!” Or “Oh NO!”

Written by Rebecca O'Connor on 14th Jul 2016

The Bank of England cut interest rates today, by 0.25 percentage points.

You may wonder what all the fuss is about.

Why is Carney cutting interest rates?

Reducing interest rates is a way of boosting spending, borrowing and investment in an economy. It is therefore a way to help stave off recession.

After the UK’s decision to leave the EU, the threat of recession was identified immediately.

The drop in the value of the Pound would normally indicate that an interest rate RISE would be on the cards.

But as most economists would tell you, the UK economy, with its high levels of personal and public debt, is ill-equipped to cope with even small rate rises right now.

So one of the things that calmed markets, businesses and individuals after the Brexit result was Mark Carney explaining that he could and would release more capital into the economy (print more money) and also reduce interest rates.

In short, it’s a confidence boost. Mark Carney is the Gok Wan of the economy – no matter the state we’re in, he can make us feel better about ourselves.

What effect will it have?

Interest rate cuts make it cheaper to borrow and act as a disincentive to save, especially in times of inflation (which is currently running at 0.3 per cent on the Consumer Price Index measure, so not that high really).

The rate cut may result in inflation rising slightly. The drop in borrowing costs – about £10 or so a month on a typical mortgage size with a current rate of about 2 per cent, stimulates spending, which leads to price rises.

This effect may be mooted as given the high levels of uncertainty in the economy, people may still feel reluctant to spend.

Also, the majority of mortgage borrowers are actually on fixed rates, so they won’t see repayments fall.

No, on me, me, me, I mean…

It depends if you consider yourself mostly a borrower, or mostly a saver.

If you are a borrower – which is, if you have a variable or tracker mortgage, loans or credit cards, then good news: you could end up paying slightly less for the privilege of having money lent to you. This might even mean you can pay back your borrowings more quickly (if you keep your current repayment levels the same, that is).

But not all lenders reduce interest rates on all products when there is a rate cut. They tend to use it as a guide and while a base rate cut usually means lower borrowing costs for the bank or building society, they do not always have to pass this on to customers. And with rates already so low, they may feel unable to pass on another cut.

If you have a tracker mortgage, it definitely will come down in line with the base rate.

If you have a fixed mortgage, it will stay the same.

If you have a variable one, it might come down.

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Loans and credit cards are more complicated. If you have a personal loan already, the chances are you fixed the repayment rate when you took it out, so this will not change. However if you are about to take one out, then you may find rates are more competitive now than they were one month ago.

Credit card borrowing rates tend not to be influenced by the base rate.

However, as a result of the £150bn capital easing, it is fair to say that generally, banks and building societies will be able to extend more credit. So you might see more competitive balance transfer deals or longer fee-free periods coming onto the market, for example.


What’s going to happen to rates in the future?

There could be another cut in the near future, then it’s all eyes on the value of the £, and inflation. If the Pound weakens further, or if inflation rises too much, this will create pressure on the Bank of England to increase rates again.

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