The Bank of England plunged deeper into uncharted territory today after cutting the base rate to a new low of 1%.
The Bank has now reduced the rate for five consecutive months in a bid to rejuvenate the economy and stave off the deepening recession.
“The Committee judged that there remained a substantial risk of undershooting [the government’s] 2% inflation target in the medium term at the existing level of bank rate,” the Bank announced in a statement today.
“Accordingly, we concluded that a further reduction in Bank Rate of 0.5% to 1.0% was warranted this month.
Growing scepticism surrounding cuts
Interestingly, while earlier cuts have been warmly welcomed by analysts, the Bank’s latest announcement has been met with growing scepticism.
For one thing, the cuts have had a devastating effect on savings rates, with returns falling by around 75% in recent months.
Furthermore, while the repeated cuts have helped reduce mortgage lending costs, the main problem facing the market now is mortgage availability – something which the latest cuts will actually exacerbate (read more about this here).
The Winners
The obvious winners will be the 4.2 million homeowners on tracker mortgages, as their mortgage costs are guaranteed to drop in line with the base rate at the end of this month.
How much will they save? For a borrower with a £200,000 loan over 25 years, monthly repayments will fall by more than £50.
For those on their lenders standard variable rate (SVR), it remains to be seen whether lenders will pass on the latest cut to their customers.
Unlike tracker deals, lenders are under no obligation to do so for those on the SVR, so it will be down to the individual banks to decide.
Other likely beneficiaries will be those planning to remortgage in the coming months, as mortgage rates should fall further going forward.
Interestingly, those on other forms of credit are unlikely to benefit from the rate cut. While the base rate has fallen from 5% to 1% in recent months, both personal loan and credit card APRs have actually increased during the same period.
The Losers
As with previous cuts, the biggest losers are savers, and particularly pensioners, who rely on interest from their savings as an income.
With the average savings rate at just 0.81%, the latest cut could more than half this to just 0.31%, meaning that people with the average savings balance of just under £3,000 would get less than £10 a year in interest.
If you have any money stashed away, it’s essential you act immediately and lock it in the best fixed rate savings account you can find before the latest cut filters through the market.
Our recommendation is the ICICI fixed rate account, which pays a rate of 4.3% with a minimum investment of £1,000.
Worrying for savers is the fact that many analysts are predicting further cuts to the base rate this year. "We now expect the Bank of England to cut rates close to zero by mid-year," warns Barclays equity strategist Henk Potts.
