Bank of England Interest Rate Drop

Posted by Rob

December 6, 2007

The Bank of England dropped interest rates by 1/4 of a percent to 5.5% due to signs of a slowing economy. This is the first interest rate cut since August 2005. This interest rate cut has led to a fall in the value of Stirling across

Reason for the Cut

The Libor rate has been rising in recent months as the worlds leading banks are left reeling from the US Sub-prime mortgage woes. This has led to higher lending costs between the banks, and thus this has been felt by those borrowing from the banks.

Wednesday there were lower than expected data for the UK service as well as talk of falling house prices. Tighter financial markets and a slow down in the economy meant the BoE took the quarter percent drop in interest rate to help steady the ship.

Although the sub-prime mortgage trouble seemed to begin correcting itself in October, further instability has followed leading the BoE to take action early to offset the effects on the UK economy.

What Does the Interest Rate Cut Mean?

The reduction in the Interest Rate will help to reduce the Libor Interbank lending rate and increase liquidity in the market. This in turn gives the large lenders more reason to lend to consumers. Even though a quarter percent may appear to be a small reduction, it can have a huge effect on home-owners.

“For home-owners, each quarter-point cut in the central bank’s benchmark rate shaves about 2.4 percent off monthly repayments on a standard mortgage of 200,000 pounds ($405,000), according to the Council of Mortgage Lenders. The payment would drop by 30.84 pounds per month to 1,275 pounds.” - Bloomberg

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