Have the base rate cuts benefited borrowers?

Between August 2006 and July 2007 the Bank of England increased interest rates five times, each by 0.25% taking the base rate swiftly up from 4.5% to 5.75%.

Of course, lenders were quick to apply these interest rate rises on to borrowing, and many homeowners and borrowers saw both their interest rates and their repayments rocket in a relatively short space of time.

From July 2007 until December 2007 things remained stable, but with interest rates having settled at a high level borrowers continued to struggle.

In December the Bank of England decided to cut the base rate by 0.25%, and it did this again in February and April, reducing the rate by a total of 0.75% and taking the base rate to 5%.

Whilst these rate cuts were welcomed by both consumers and industry sectors it seems that not everyone has benefited from the cuts. There are a number of reasons why the base rate cuts have not necessarily had a positive impact on many consumers.

First of all, just as the first base rate cut came around the leading energy firms announced that the cost of wholesale energy had rocketed, and therefore energy usage bills would also have to go up.

True to their word the energy firms put gas and electricity prices up by a significant amount in the first few weeks of the year, undoing any financial benefit that had come from the base rate cut. After this many other costs also went up including water rates, council tax, and food prices. Petrol prices in particular have rocketed over recent weeks, and have also impacted significantly on household finances.

However, it is not just rising bills and living costs that have resulted in consumers getting a raw deal despite the interest rate cuts. Lenders are still trying to deal with the damaging effects of the ongoing global credit crunch, which swept across the nation last summer, and as a result of this borrowing has become not only more restricted but also considerably more expensive.

From mortgages to personal loans and from credit cards to other forms of finance, the cost of borrowing has rocketed, particularly for certain groups such as those with damaged credit.

For example, the cost of mortgages has rocketed over recent months, with many lenders hiking up their mortgage interest rates despite the rate cuts. Even a £50 billion rescue plan launched by the government has failed to kick in yet, and mortgages are set to continue being expensive for the time being.

One industry official said: ‘In the short term the trend of increasing prices and products being removed from the market is not going to be reversed. As and when the banks start lending to each other, the rate for lending will go down and that means that that will start to bring the price down but it is not going to be a dramatic reversal. It is going to be a slow process at best.’

A number of lenders have recently reduced their mortgage rates on some products following the recent base rate cut in April, but industry officials claim that this is not a sign of things to come, with one official adding: “Regrettably this is a flash in the pan. These cuts will be based on money market rates prior to Tuesday’s CPI figures and the Bank of England’s inflation report. Unfortunately it’s not the start of a trend and, worse than that, I think lenders will start putting fixed-rates up again.”

Many lenders have not even responded to the last base rate cut even though it was over five weeks ago, and a large percentage of those that have responded have not passed on the full rate cut to borrowers, which means that many borrowers are either getting no benefit or limited benefit from the base rate cuts.

Credit card customers are also failing to benefit from the base rate cuts according to some officials, with many still paying way over the odds on interest because providers continue to hike up rates, fees, and charges.

One industry professional stated: “The Bank of England has trimmed interest rates three times since December 2007. But, despite the cuts, interest charges on outstanding credit card balances remain disgustingly high.”

He added: “The typical annual percentage rate on popular credit cards is around 16 per cent, which is over three times higher than the Bank of England base rate. This means we are forking out £7.7 billion in annual interest payments – around £250 for every credit card holder a year.”