Bank of England Cuts Rate to 5.25%

Today, the Bank of England (BoE) decided to lower the base rate from 5.5% to 5.25% because of the weakening UK economy. The BoE had already reduced interest rates by 0.25% on 06 December 2007, but in an effort to keep near the targeted 2% inflation for the term, taking into consideration higher food and energy prices, they have acted again. In addition, several business polls have reported that consumer spending is continuing to slow. Also, according to a BoE statement published by FT.com, the credit situation for personal and business ventures is becoming direr.

Ian McCafferty, the Chief Economic Adviser to CBI, said, “The Bank’s own forecast in November suggested that two rate cuts of 0.25% would be required to meet its inflation target in 2009, and today’s cut brings the base rate down towards a more neutral position. This should help ensure that there is a soft landing to the slowdown now underway.”

Unfortunately, not all mortgage lenders intend to pass this potential savings on to their borrowers. BBC News reports that Lloyds TSB, Cheltenham & Gloucester, Woolwich through Barclays, HSBC, and First Direct plan to ignore the BoE’s lead, whereas Halifax, Nationwide, Abbey, NatWest, and Royal Bank of Scotland are among those that plan to lower their standard variable rates (SVRs). A similar situation occurred after the rate cut in December of 2007. Only a handful of mortgage lenders decided to pass the rate cut on to their borrowers.

Keep in mind the sort of mortgages available: variable rate, fixed rate, and capped rate. With a variable rate mortgage, your interest rate will increase and decrease according to the lender’s base rate, which is related to the BoE’s base rate. A variable rate mortgage would be beneficial to many consumers in the current mortgage market because their rates would decrease along with the recent BoE rate cut.

With a fixed rate mortgage, the lender will offer a rate that is based upon the BoE’s base rate, which is quite low and which does not seem as though it will be reduced again in the near future. Consumers concerned with the possibility of a rate increases in the near future may want to consider finding a fixed rate mortgage now, as the base rate is lower than it has been in a while.

Finally, the capped rate mortgage means that you will pay an SVR with an upper limit.