Wednesday 8th October 2008
by Bob Bardsley
Know Your Money Editor
The first full calendar week of the month may be a time of great interest for many economists, with the Bank of England's monetary policy committee (MPC) typically announcing whether the base rate of interest will change at noon on Thursday. But this week saw a change to the usual methodology, with the announcement instead coming on Wednesday. Moreover, the decision itself could be seen as out of the ordinary by many who track the progress of the base rate.
Not only is the choice to cut the base rate the first move to have been made since April - despite many economists calling for action to be taken to quell the economic crisis - but the actual effect, a half percentage point reduction, is greater than might have been predicted. Indeed, the last time a move of more than 25 basis points - or quarter of a percentage point - was made was in November 1999. So what has caused the MPC to take such action again for the first time in almost nine years? And what can consumers expect to happen to their finances as a result?
HM Treasury
The decision to adjust the base rate was brought forward to coincide with an announcement from HM Treasury regarding the ways in which UK banks are to be shored up in the short term. The government body this morning stated that some £200 billion is to be made available to financial services providers to help them through any liquidity problems which may arise in the coming weeks. Furthermore, efforts are being made to enable the leading banks to lend to one another more easily by allowing new types of collateral to be used to secure loans.
Currency in both pounds sterling and US dollars is to be auctioned by the government to the banks on contracts of three months and one week respectively, meaning the financial institutions should be able to see their way through any immediate monetary crises by spreading the cost through such an auction. HM Treasury adds that steps are being taken to make sure that lending in the UK remains available over the medium term.
The action follows a period of consultation which has included collaboration from eight of the high street banks and building societies. The list of organisations consulted by HM Treasury comprises Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide, Royal Bank of Scotland and Standard Chartered.
The Bank of England
The Bank of England made its own comments around lunchtime as the decision to drop the base rate was announced a day early. It too is looking towards the bigger picture, rather than expecting the actions to immediately benefit consumers. The central bank noted that lending conditions are tight as banks lower their exposure to risk from both consumer and business markets. However, it suggested that HM Treasury's announcement is likely to increase the chances of the base rate cut having a real effect on the wider economy.
In terms of household affordability, the MPC identified utility costs as being a major driving force behind the relatively high rate of inflation. This, which reached 4.7 per cent in August on the consumer prices index, is predicted to breach five per cent in the coming months before the government action filters through to ease conditions in real terms for UK citizens. The Bank reasserted its commitment to culling inflation back down to the target range of between one and three per cent in the long term, although that may come as cold comfort to families feeling the immediate pinch of rising food and fuel costs.
The Industry Response
Responses to the moves from the financial services providers included comments from some of those involved in the initial consultation. While it might be expected that these would welcome the specific action taken, Nationwide chief executive Graham Beale pointed out that his institution is not the only building society to be affected. Rather, he noted that all building societies in the UK are to be served by the relaxed lending rules and liquidity assistance, helping to put in place a "fair and equitable arrangement".
Outside of the direct banking industry itself, the Association of Mortgage Intermediaries also praised the moves - but expressed the opinion that action should have been taken sooner. Director general Chris Cummings said: "The delay to this much-needed action from Government has caused significant impact on consumers." He added that the moves could be too little, too late, as a continuation in the economic turbulence may yet see mortgage products continue to vanish from the marketplace and lending further tighten across the sector.
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