The Bank of England has made another emergency cut to UK interest rates to temper the impact that coronavirus is having on the economy, taking the base rate to 0.1% – its lowest level ever.
Changes to interest rates are normally decided by the Bank of England at its Monetary Policy Committee (MPC) meeting. The next one was scheduled for 25 March, but the economic fallout from the coronavirus outbreak has forced the Bank to make two emergency rate cuts in eight days.
On 11 March the base rate was cut from 0.75% to a previous record low of 0.25%. Now, just over a week later, it has been slashed again to just 0.1%.
Here, Which? explains why the base rate is important and how the decision to lower it by 0.65% will impact your finances over the coming months.
- You can keep up to date with our latest advice on the coronavirus outbreak over on our coronavirus advice hub.
Coronavirus outbreak: base rate hits record low
In light of the actions taken by the government to tackle the spread of the coronavirus and the impact the pandemic is having on the global and domestic economies, the MPC held an additional special meeting on 19 March.
It voted unanimously to reduce the base rate by a further 0.15% to 0.1%. This is the lowest the rate has ever fallen to, even including the financial crisis.
Base rate reductions theoretically bring cheaper borrowing, but the Bank says it accepts some banks and building societies may struggle to reduce rates further than their current levels.
With this in mind, it will make additional funding available to banks and building societies to increase their lending capacity, with small and medium-sized lenders given priority.
The Bank confirmed it would still meet on 25 March and publish the results of the meeting on 26 March.
Why is the base rate important?
The Bank of England base rate – sometimes referred to as the bank rate or UK’s interest rate – impacts how much banks and other lenders have to pay to borrow money.
When the base rate changes this either increases or lowers their costs. This will usually have a knock-on effect on the rates they then to decide to offer borrowers and savers.
Tinkering with the base rate is meant to impact our spending and borrowing behaviour, and help support the economy by keeping inflation as close to the government’s 2% target as possible.
Lowering the base rate can help stimulate the economy by encouraging banks to lend more, and consumers and businesses to spend more rather than save.
Raising the base rate typically has the opposite effect, slowing down spending as saving rates get better and borrowing becomes more expensive.
How often does the base rate change?
The MPC usually meets eight times a year to decide what the base rate should be, although it has the power to hold unscheduled emergency meetings like it’s done recently.
The committee has eight members, each of whom has a vote on whether the base rate changes or stays the same.
To make its decision, the MPC looks at a range of figures including the current inflation rate, wage growth, cost of goods (including the impact of changes in exchange rates), investment levels, consumer spending, unemployment rates and economic growth.
What the base rate change means for borrowers
The fall in the base rate could be good news if you need to borrow money.
The cut will make it cheaper for banks and other lenders to borrow and this, in theory, should be passed on through lower mortgage, loan and credit card rates.
One of the most immediate effects of a base rate change for existing borrowers will be on mortgage payments.
Variable-rate and tracker mortgage customers could see some or all of the overall rate cut of 0.65% passed on in the next few months, which will lower their monthly repayments.
However, homeowners on a fixed-rate deal won’t benefit from the base rate cut until their deal comes to an end.
A borrower with a £150,000 mortgage with 20 years left on the average standard variable rate of 4.89% would be paying £980.84.
The overall 0.65% decrease to the base rate means your monthly repayments could fall to £928.05 a month if the reduction is passed on in full – saving you £633 a year.
The graph below shows how the base rate impacts the standard variable rate on residential mortgages when it’s changed.
If you’re worried about the cost of your mortgage spiralling, you might want to consider remortgaging to a fixed-rate deal which can shield you from future fluctuations.
You can use our base rate calculator tool below to find out how your mortgage payments will be impacted by the rise.
Have mortgage lenders cut rates?
So far, the below lenders have announced they will cut their standard variable rates by the full 0.5% base rate cut announced on 11 March. We will update this table with news of any further reductions that take on the latest cut.
|Royal Bank of Scotland||0.5%|
We will continue to update this section as more banks and building societies make announcements.
What the base rate change means for savers
While borrowers could be better off, savers could see rates on accounts fall.
The base rate cut, in theory, should filter through to savers in the form of worse rates.
However, this takes time, so you should act now to protect your savings from providers cutting your rate.
If you don’t need access to your cash, you might want to lock into a good rate with a fixed-rate savings bond. Just bear in mind that you may miss out if the base rate recovers and rises again.
These typically come with higher interest rates than an instant-access, notice or regular savings accounts and can extend over a period of one to five years.
What is the government doing to boost the economy?
The Bank of England’s first base rate cut was announced on the same day that the Chancellor delivered the 2020 Budget, on 11 March. This move was designed to have maximum impact on the economy in the wake of coronavirus.
In the Budget, the Chancellor announced a £30bn package of measures to support people and business.
The Chancellor committed unlimited resource to the NHS to ensure that it has what it needs to fight the virus.
For people who have to go off work, either with coronavirus or through self-isolation, Statutory Sick Pay will be paid from the first day of illness, and a sick note can be obtained by calling 111 rather than visiting a doctor.
The government also said it would cover the cost of Statutory Sick Pay for 14 days, to ease the burden on businesses, which usually have to pay the benefit.
The Chancellor also made changes to the benefits system, making it easier and quicker for the self-employed to access employment and support allowance (ESA). The minimum income floor for Universal Credit will be temporarily removed, and no one will be forced to make Job Centre visits.
A £500m hardship fund will be provided to local authorities to support vulnerable people.
In the Budget it was announced that businesses would be able to defer tax and National Insurance payments with HMRC – called ‘Time to Pay’ – over an agreed period, while the government said it would launch a new temporary ‘Business Interruption Loan Scheme’.
This would supply loans of up to £1.2m to small and medium-sized businesses, with loans guaranteed up to 80% by the government.
Less than a week after the Budget, on 17 March, the Chancellor announced a further £350bn package to support businesses – promising to go even further if needed.
This included upping the cash grants available to 700,000 small businesses from £3,000 to £10,000 and extending the 12-month business rates holiday for all firms in the retail, hospitality and leisure sectors.
It also means those with a rateable value of less than £51,000 will have access to a grant of up to £25,000 per business.
In addition, the Chancellor extended the new Business Interruption Loan Scheme announced at the Budget to provide loans of up to £5m rather than £1.2m, with no interest due for the first six months, to support lending to small and medium-sized businesses.
Mr Sunak said to support liquidity amongst larger firms, he had agreed on a new lending facility with the Governor of the Bank of England to provide low-cost, easily accessible ‘commercial paper’ – a type of unsecured loan for companies.
This move was referenced by the Bank of England in its decision to cut the base rate to a historic low of 0.1%.
The Bank of England stated: ‘On 17 March, this combined package of measures was complemented by the announcement by HM Treasury of the Covid-19 Corporate Financing Facility (CCFF), for which the Bank will act as HM Treasury’s agent. By purchasing commercial paper, the CCFF will provide funding to non-financial businesses making a material contribution to the UK economy to support them in paying salaries, rents and suppliers while experiencing the likely disruption to cashflows associated with Covid-19.’
Which? coronavirus advice
Experts from across Which? have been compiling the advice you need to stay safe, and make sure you’re not left out of pocket.
You can see all the latest news in our coronavirus advice hub, or you might be interested in the following stories:
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- Coronavirus: your travel and consumer rights Q&A
This story was originally published on 11 March and has since been updated to reflect the latest developments.