The Bank of England has cut interest rates, taking the base rate to a new low of 0.25%. This is the first cut since March 2009, and how welcome it is will depend on your financial situation. The Bank also announced a new round of quantitative easing (QE) – pumping money into the economy to buy government bonds.
What does the cut mean for mortgages?
For anyone with a fixed rate mortgage, the cut in interest rates will have no effect. But if you’re borrowing is on a variable rate then it’s likely to be good news. The borrowers that track the base rate will see their monthly repayments fall, probably from the start of September.
What does the cut mean for savers?
Savers have been suffering since the last interest rate cut and are likely to see returns fall further as a result of the bank’s decision. According to financial information firm Moneyfacts “Savings rates have already plummeted to record lows in recent weeks – continuing the downward spiral witnessed for several years now – and deals are being pulled from the market at an alarming rate, so a cut to interest rates is only going to increase savers’ pain.” -04/08/2016
Will other types of borrowing be cheaper?
Overdrafts and credit card repayments will not be cheaper because of the base rate cut- the interest rates on these types of borrowing are separate to the Bank base rate and have been rising in recent months. According to the Bank, the average interest rate on a UK credit card is now 17.94%, compared with 15.73% in March 2009, while overdraft rates have gone up from 18.62% to 19.6%.
Will pensions be affected?
The interest rate cut and sending more money into the markets by acquiring UK government bonds – a process known as quantitative easing – will hit pension funds. As a result of these measures, the price of government bonds, known as gilts, has gone up. Gilts have a fixed rate of return, so as their price rises investors get less income – a lower interest rate – for their money. Pension funds that offer a pay-out based on salaries usually invest heavily in gilts, and the lower return available means it will be difficult to meet their promises and deficits could grow. Also, Annuity pay-outs have already fallen, and are set to fall further if returns from gilts remain low. But there may be one advantage for savers further from retirement – QE could also boost share prices as investors take on more risk in search of returns; this could be good for anyone building up their pension.