Effects of the Recent Bank of England Rate Cut on Consumers

Written by Karen Bryan

The effects on consumers, caused by the recent 0.25% reduction in the Bank of England Base Rate from 0.50% to 0.25%, are highlighted in the infographic below.

icount infographic

The Bank Interest Rate Drop infographic was created by icount

While you might assume that a cut in the Bank Base Rate would lead to mortgage holders paying less, with 46% of mortgages being fixed rate, that’s not the case for many buying their own homes. Borrowers on the Standard Variable Rate (SVR) aren’t guaranteed a 0.25% reduction in the rate of interest that they pay. There is no legal obligation for the lender to cut the SVR in line with the Base Rate. It’s the 20% of borrowers on tracker mortgages who should benefit most, unless there is a minimum rate payable set by the lender (known as a floor).

The reduction in the Bank of England Base Rate may lead to lower rates of interest on secured loans. But the rate of interest paid on credit cards is unlikely to change. It is based more on the perceived creditworthiness of the card holder. It’s also unlikely that the rate of interest charged on overdrafts on current accounts will change.

Those with savings in accounts paying a variable rate of interest are being hit hard. Several providers have chopped the rate of interest paid in their savings accounts by more than 0.25%, e.g. First Direct will cut the rate of their Cash ISA by 0.40 next month, and Tesco Bank will cut the interest rate paid on their Internet Saver account by 0.35% in November. I was caught out by putting some cash in a United Trust Bank Three Year Tracker Bond earlier this year. At that time, the talk was of an increase in the Bank of England Base Rate on the horizon. Now the opposite has happened, and the rate of interest paid on that tracker savings account has dropped by 0.25%.

If you have a defined contribution personal pension, with the funds invested in the stock market, you will have seen a big increase in the value of your pension pot with rising share prices. However, if you were thinking of using your pension pot to buy an annuity (an income for life), then the amount paid out per year by the annuity will have dropped. The State Pension is not affected by the changes in the Bank of England Base Rate.

If you’ve been on holiday abroad in the last few weeks you may well have been adversely affected by the drop in the value of the pound against the Euro and the US Dollar. The exchange rate for the UK pound had already fallen prior to the Base Rate cut after the result of the EU referendum. The reduction in the Base Rate exacerbated the fall in the value of the pound. Although the pound has gained a little ground in the last week. We are going on holiday to the Greek island of Corfu next month. I’m really glad that it’s an all-inclusive holiday paid for a few months ago. We also paid for car rental upfront. Therefore, our only expense to be paid for in Euro during our holiday will be petrol for the hire car.

It’s a mixed bag for most consumers, with some financial gains and some financial losses.

Personally l feel worse off, as I have more savings than debt. It’s not only the fall in the rates of interest paid on savings accounts that adversely affects me, it’s the possibility of an increase in the rate of inflation. This could be caused by the increased cost of imports due to the lower value of the pound. The combined effect of lower rates of interest on savings with a higher rate of in inflation would reduce the real value of my savings.