Industry reacts to BoE rate cut

John Hewitt Jones

August 4, 2016

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The Bank of England has cut interest rates from 0.5% to 0.25% and launched a £70m quantitative easing package in a bid to calm market nerves following the UK’s decision to exit the EU.

Professionals from across the industry have responded to the decision, highlighting the implications for lenders and consumers.

John Goodall, CEO and co-founder of Landbay, said: “Today’s decision to cut interest rates was widely anticipated, but it is a disaster for savers. The base rate has now officially fallen below the rate of inflation (CPI), so for the first time since 2014, real interest rates are negative.

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“If banks do decide to pass the cut on to savers, cash on deposit could be effectively losing savers money. Unfortunately, the outlook for savers is bleak as CPI is expected to rise further and rates are likely to remain low for a long time. It is important that people are aware of the many alternatives providing a resilient and rewarding home for their money.”

James Jones from Experian suggested pensioners would be the first to feel the heat: “The rate cut may affect retirees first if pension providers respond by adjusting their annuity rates. Savers could see more top deals ‘taken off the shelf’ – as many banks and building societies have already done.

“People on tracker mortgages are likely to see their monthly payments fall, assuming providers pass on the reduction. But some could miss out if their deals include a ‘tracker floor’, a limit to how low their rate can drop. Home buyers should keep a level head. Just because rates have fallen doesn’t mean they will stay at these historic lows – but for many it is likely to be a great opportunity to grab a very cheap mortgage deal, for both mortgagees and people buying their first home.”

And Calum Bennie, savings expert at Scottish Friendly, agreed: “Any false sense of security around the outlook for savers post-Brexit has now been removed. It’s particularly ironic that this move is most likely to affect the cash savings of the over 60s, the demographic that were among the most in favour of leaving the EU.

“This decision has the chance of promising much, but delivering very little. As much as five out of every six mortgage borrowers in UK would see no immediate benefit from cut, cash savings rates will become even worse and pensioners will suffer from even lower annuity rates. We are in an era where people have to be making sure their money is working as hard as it can.”

“Saving more for retirement will become a national priority as a result of this move. Stocks and shares ISAs offer savers a chance to access the growth they used to expect from their current account. Although people need to consider the risk involved, there are various degrees of risk people can take.”

But Jeremy Duncombe, director, Legal & General Mortgage Club, said the move would not have a significant impact on mortgage lenders:“Following the vote to leave the EU, there has been much speculation around whether the Bank of England would reduce the base interest rate. Today’s decision is therefore not too much of a surprise.

“However, whilst this action by the Bank is significant, it is unlikely to have much impact on current fixed rates for mortgages. Despite the base rate remaining at 0.5% for seven years, fixed rates have been falling consistently since 2009. Many lenders will have thus already priced into their products and deals such a reduction in rates, with few looking to drastically amend their offers off the back of today’s news.

“The fact remains that current fixed rates represent a good deal for consumers, and borrowers would be prudent to use these prevailing circumstances to speak to an adviser about remortgaging options available to suit their individual financial needs.”

Stuart Law, CEO and co-founder of Assetz Capital, argued the rate cut would cause more lenders to look towards alternative finance: “It’s unsurprising that interest rates have fallen today as the BoE seeks to minimise the economic effects of a Brexit. Once again savers are set to suffer as traditional savings accounts become an even less attractive option. We are expecting savvy savers to continue to turn to the alternative finance market, which has matured and grown out of the effects of the last financial downturn, and get decent returns on their capital.

“Alongside the expected rise of lenders flocking to the alternative finance market to deploy some of their savings for a better investment return, Assetz Capital also predicts that the number of business borrowers will also rise sharply as a result of the cut interest rate. As banks are expected to become more reluctant to lend in the current financial climate an ever-increasing number of businesses are turning to P2P lending to provide flexible, fixed rate loans, providing they pass the strict checks carried out by lending platforms.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, underlined the importance of lenders passing on the cut to those on tracker-rate mortgages : ‘A rate cut was widely expected by the markets, with the Bank of England under pressure to stimulate the stalling economy.

‘It is important that lenders immediately pass on the full benefit of the cut to those on tracker-rate mortgages and those on products linked to their lender’s standard variable rate.

“Swap rates are at all-time lows and we expect to see even more competitive fixed rates in coming days. It is already possible to fix for two years at less than 1 per cent and for five years at less than 2 per cent. These are astonishingly-low rates but the could go cheaper still. Lenders are keen to lend and will need to be competitive in terms of the rates they offer in order to attract new business.’

Jeremy Leaf, north London estate agent and a former RICS chairman, said the cut would incentivise consumers to remortgage: “Today’s rate cut will provide consumers with an added incentive to make the decision to buy or remortgage.

“Confidence has taken a big hit since the referendum and people are nervous about taking on longer-term debt.

“We think this rate cut is particularly aimed at longer-term investment decisions on the development side, rather than individuals taking out mortgages. Critics may say it is too early for hard data as to how the economy is faring but the Bank will be privy to information behind the scenes which may have made a rate cut a prudent step.’

Adrian Anderson, director of mortgage broker Anderson Harris, agreed: “With rates already at historic lows, there is not much room for manoeuvre in terms of reductions so the Bank needs to make them as effectively as possible.

“Today’s rate reduction will have little impact on the mortgage market. A rate cut will be a bonus for those on variable-rate trackers and it will help encourage people to remortgage. But banks already have very tight margins and may want to focus on savers who are struggling to earn a decent return, rather than cutting rates further for borrowers.”

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