Euro crisis – how would a rate cut affect you?Bank of England base rate could fall to 0%
30 May 2012
The Bank of England could be set to cut interest rates to zero and conduct another round of quantitative easing should Europe’s economic woes continue to escalate. But what would that mean for you?
With Greece's exit from the euro becoming an increasingly realistic outcome unless it can form a coalition government to back austerity measures in elections to be held next month, the future of Europe's single currency remains at risk.
The Bank of England's Monetary Policy Committee (MPC) has been building a contingency plan to deal with the knock-on effect of Greece or others leaving the euro and hinted that it could include cutting interest rates to zero and adding to its quantitative easing programme, worth £275 billion so far.
Tracker mortgages could benefit
Although the Bank of England base rate has been at 0.5% for more than three years, the cost of borrowing for UK banks has risen sharply as overseas investors fear that the UK could be exposed if Greece or any other European countries run out of money.
This is why a low Bank of England base rate doesn't necessarily result in cheaper mortgage rates being offered by banks to consumers and there is no evidence that further interest rate cuts would effect mortgage rates, credit card or personal loan rates.
However, for those with tracker mortgages, for which you pay an agreed percentage over the Bank of England base rate, a further rate cut would be good news, providing the product does not have a price floor. Lloyds TSB and Nationwide's standard variable rate mortgages would both have to be cut, for example.
Protect your savings
It's vital to have your savings with companies that are full members of the Financial Services Compensation Scheme (FSCS), particularly if the worst case scenario were to unfold in Europe and UK banks suffer due to their close ties to ailing Eurozone countries.
Banks listed on our best buy tables must be full members of the FSCS. With inflation expected to remain well above the Bank of England’s target rate of 2% for the rest of the year, it will continue to be tough for savers to find real returns, and therefore important to shop around for the best rates.
Pensions and annuity rates could suffer further
Another round of quantitative easing (QE), which effectively means printing more money, could have further negative implications for pension savers and annuity rates, as it drives down the price of bond yields.
Pension funds invest heavily in government gilts and commercial bonds and would therefore be exposed to smaller returns, while annuity rates are also linked to the price of bond yields.
Annuity rates have fallen sharply in recent years so when it comes to converting your pension into a regular income you'll need a bigger pension pot to derive the same pension income. You'll need to increase your pension contributions to do this or make do with a lower-paying annuity to see you through retirement.
- Annuities explained - our guide to how they work and the different options
- Which? recommended providers - find our best-rated banks covered by the FSCS
- Call the Which? Money Helpline - to speak to an expert on any financial issues