Interest rates reach historic low

By politics.co.uk staff

The Bank of England has cut interest rates by 0.5 per cent, bringing them to their lowest level in the 315-year history of the central bank.

The monetary policy committee (MPC) pushed the Bank rate down to 1.5 per cent – as the UK faces 2009 in recession and the threat of deflation grows.

“It’s the right move but the essential thing now is that this cut is passed on,” said shadow chancellor George Osborne, who reiterated his calls for a national loan guarantee scheme.

The cut means interest rates have now fallen from five per cent in October to the current level of 1.5 per cent.

Liberal Democrat economics spokesman Vince Cable said: “As the recession deepens and the risk of deflation continues to loom on the horizon, this latest interest rate cut is welcome.

“However, cutting interest rates can only go so far to help business and individual borrowers. For many borrowers, the problem is not the price of credit but its availability.”

Pressure now mounts on lenders to cut interest rates on mortgages and loans.

However, with banks and building societies keen to attract savers’ cash to help fund their lending, widespread cuts are not expected.

So far only Lloyds TSB – now partially owned by the government – has pledged to cut interest rates on standard variable rate (SVR) mortgages and tracker mortgages.

Trevor Williams, chief economist at Lloyds TSB Corporate Markets, said: “This was another hefty cut by the Bank of England but, given the circumstances, it was no great surprise.

“The economic situation has worsened dramatically over the past month, not just in the UK, but globally, so another cut was expected across the board.”

Nationwide has stated its tracker mortgages will no longer drop.

The Council of Mortgage Lenders (CML) – which represents 98 per cent of UK lenders – has warned borrowers should not expect cuts, as the needs of savers and borrowers need to be balanced.

The body warns many tracker deals will have reached their floors already with the Bank rate being so low and borrowers on SVR mortgage should not expect the interest rate cut to be matched.

The body warned as savings rates drop there is less incentive for savers to save and lenders have less cash to lend.

However, Peter Vicary-Smith, chief executive of consumer watchdog Which?, has hit out at banks for cutting savings rates but not mortgage rates.

“Banks can’t have their cake and eat it – they must either maintain rates for savers or pass on the full benefits of the rate cut to their mortgage customers,” he said.

“Many banks are offering rates as low as 0.1 per cent on savings accounts so for them to say they are looking out for savers by not passing the rate cut onto borrowers is a hollow argument.”