At a meeting of the Bank Of England's monetary policy committee today the 6th of November 2008 the Bank decided to drop bank base rate by a whopping 1.5%. This level of reduction has never been seen before and the new bank base rate of 3% has not been seen in the United Kingdom since 1954.
However will it make any difference to the market at all? I am sad to say that in my humble opinion I don't think it will. It is my belief that lenders in the UK are fundamentally unable to reduce their lending rates by 1.5% and that is just considering this recent rate cut. Most lenders if not all of them have failed to pass on the last rate cut and are currently holding their standard variable rates at a rate which is some 6 months out of date now.
The main difficulty, not only in the UK but worldwide, is that although the banks have dropped their base rate, the cost of lending from bank to bank has stayed the same. The name used for the rate at which UK financers lend to each other is the LIBOR rate. This acronym stands for the London Inter-Bank Offer Rate. The LIBOR rate has come down very slightly over the last few months, but nothing like the way the base rate has plummeted, so money, although it seems cheaper, still costs almost the same.
Since the credit crunch and the fact that lenders poor quality lending books have been made public lenders are very reluctant to actually lend to each other and it is this reluctance or the opposite that influences the LIBOR rate. The main problem we have at the moment is everyone in the industry has a memory, they all remember that each of them has lent dubiously in the past and with credit risk being the biggest issue today they just don't want to be exposed.
The massive injection of capital which has been promised by the worlds different governments would surely ease the situation, I hear you say. I am sorry but this is not the case. Rumours have come to the fore that a stipulation of these injections is that there will be mandatory set lending percentage increases forced on the institutions over the coming year and with that in mind they are saving themselves for these. I don't know but what is clear is that there is very little money out there and that the rates are poor for any lending that is occurring.
I personally think that todays decision will have the effect of boosting consumer confidence, people will think that low base rates can only mean things are going to get better. That said they will soon realise this may not actually be the case, especially if their particular lender does not pass that increase on to them within their own mortgage. That said commercial finance should get cheaper as most commercial finance deals are based as a percentage over base rates so any deals that have been done in the past will benefit from this cut.
What is unusual though is that many commercial lenders have all of a sudden increased their over base rate levels, or have eliminated their levels completely. This is to offset any risk of money loss when such a change in the base rate is put forward. It seems odd that they should react so quickly and shrewdly. Did they know the change was coming perhaps? Impossible to say....or prove.
So what effect will the drop actually have? In the short term, probably very little effect at all. Nevertheless, I would like to think that over the coming months we will see the positive effect trickle down bit by bit into the markets. If it doesn't reach Joe Public, and doesn't reach sooner rather than later, we may have to face the possibility of being in some very, very serious financial trouble indeed. Fingers crossed then!
However will it make any difference to the market at all? I am sad to say that in my humble opinion I don't think it will. It is my belief that lenders in the UK are fundamentally unable to reduce their lending rates by 1.5% and that is just considering this recent rate cut. Most lenders if not all of them have failed to pass on the last rate cut and are currently holding their standard variable rates at a rate which is some 6 months out of date now.
The main difficulty, not only in the UK but worldwide, is that although the banks have dropped their base rate, the cost of lending from bank to bank has stayed the same. The name used for the rate at which UK financers lend to each other is the LIBOR rate. This acronym stands for the London Inter-Bank Offer Rate. The LIBOR rate has come down very slightly over the last few months, but nothing like the way the base rate has plummeted, so money, although it seems cheaper, still costs almost the same.
Since the credit crunch and the fact that lenders poor quality lending books have been made public lenders are very reluctant to actually lend to each other and it is this reluctance or the opposite that influences the LIBOR rate. The main problem we have at the moment is everyone in the industry has a memory, they all remember that each of them has lent dubiously in the past and with credit risk being the biggest issue today they just don't want to be exposed.
The massive injection of capital which has been promised by the worlds different governments would surely ease the situation, I hear you say. I am sorry but this is not the case. Rumours have come to the fore that a stipulation of these injections is that there will be mandatory set lending percentage increases forced on the institutions over the coming year and with that in mind they are saving themselves for these. I don't know but what is clear is that there is very little money out there and that the rates are poor for any lending that is occurring.
I personally think that todays decision will have the effect of boosting consumer confidence, people will think that low base rates can only mean things are going to get better. That said they will soon realise this may not actually be the case, especially if their particular lender does not pass that increase on to them within their own mortgage. That said commercial finance should get cheaper as most commercial finance deals are based as a percentage over base rates so any deals that have been done in the past will benefit from this cut.
What is unusual though is that many commercial lenders have all of a sudden increased their over base rate levels, or have eliminated their levels completely. This is to offset any risk of money loss when such a change in the base rate is put forward. It seems odd that they should react so quickly and shrewdly. Did they know the change was coming perhaps? Impossible to say....or prove.
So what effect will the drop actually have? In the short term, probably very little effect at all. Nevertheless, I would like to think that over the coming months we will see the positive effect trickle down bit by bit into the markets. If it doesn't reach Joe Public, and doesn't reach sooner rather than later, we may have to face the possibility of being in some very, very serious financial trouble indeed. Fingers crossed then!
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