MONEY COMMENT
The Effect Of The Base Rate Cut

By Stuart Watson (TMFTiger)
February 6, 2003

Steady Eddie caught a few people napping on Thursday. The Bank of England decided to cut interest rates from 4% to 3.75%. It's the first time rates have been changed since November 2001. They haven't been this low since 1955 when Einstein drew his final breath and Elvis Presley signed his first record contract.

Interest rates are used by the Bank to control inflation. It is mandated by the Government to keep inflation at or around the 2.5% level (there are more details here if you're that way inclined). The Bank feels that due to weakening demand in the economy, there's a risk the inflation target will be missed on the low side. At the moment, the rate of inflation is at 2.7% though. A reduction in interest rates, making it cheaper to borrow, should open private and corporate wallets.

We might see a further 0.25% cut in the next few months but the financial markets aren't expecting much more than that for the moment. Of course, if the economy really starts to struggle that could change. Although today's move was a surprise, it was more the timing than the extent of the cut that was unexpected.

Mortgage rates should come down and savings rates are likely to be reduced, too. That said, lots of companies sneakily pushed through savings cuts over Christmas whilst we were too drunk to notice. Only yesterday, National Savings lopped 0.15% off a number of their accounts.

It may take a few weeks before all the changes following this cut are announced. It would make sense to review your accounts to make sure you're still getting (or paying) a competitive rate. Rates for unsecured debts like personal loans and credit cards are less likely to change so it's more important than ever to pay off your expensive debts as quickly as possible.