Bank of England Slashes Rates by 1.5%

Yesterday, the Bank of England cut interest rates in the UK by 1.5%, moving the rate to 3%. This is a drastic measure, and the size of the cut is immense. The last time the BOE reduced rates this much all at once was 1981. It is triple the size of the cut the European Central Bank made the same day.

Perhaps the most insightful thing anyone said was a quotation from Shadow Chancellor George Osborne who said, “This is a shot in the arm for the economy, but it shows how sick the patient is.” Echoing that sentiment, the FTSE 100 index closed down 5.6%, or 255 points at 4,275.7. Rate cuts usually force stock prices higher.

In theory, this means that a mortgage holder with a note of £150,000 will save £134 a month. That presumes, however, that the lower rate is passed along. The BBC reports, “The Nationwide, HBOS, the RBS/NatWest group and nationalised Northern Rock will cut their main variable lending rates by the full 1.5% on 1 December. Lloyds TSB and the Abbey announced similar steps on Thursday.” In other words, they're going to skim off the 1.5% for the next three weeks.

The Beeb also notes, “One problem, lenders say, is that the key to mortgage costs is not the Bank of England's base rate but Libor - the London Interbank Offered Rate - which is the rate at which banks lend to each other. The three-month sterling Libor rate - which has the greatest influence on new tracker mortgages - fell from 5.56% to 4.49% on Friday, its lowest level since the end of 2005. But the rate remains almost one and a half percentage points above the Bank of England's base rate - still well above pre-credit crunch levels.”

The entire trouble is that banks don't want to lend to one another in any country. Eventually, they will have to because a bank that doesn't lend doesn't make any money. That is a long-term matter, though, and right now banks are focused on making it to Friday afternoon. The BOE is doing what it can, and the PM is guiding things as best he can. Patience is what is demanded now.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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