Could Interest Rates Be Heading To Zero?
Over the last week some prominent UK finance journalists and even the head of the IMF Christine Lagarde have been opening up the argument for a further cut in UK interest rates. Since the financial crash in 2009 Bank Of England interest rates have been held at a record low of 0.5%, preventing our debt laden economy from collapsing down around us!
What could a further rate cut mean for you? Will it make a difference to the economy? Are there any dangers in dropping rates to 0%?
What could a further rate cut mean for you?
The problem for mortgage borrowers is that mortgage lenders have recently been raising their standard variable rates so there’s no guarantee that any rate cut will be passed on to mortgage borrowers. If you’re on a Bank of England Tracker mortgage of course, then the cut will have to be passed on and you will benefit!
If you’re a saver then it’s more bad news! Savers have been seriously squeezed since interest rates dropped to 0.5% in 2009. If you’re reliant on interest from savings as an income, you may even feel that you’re at breaking point already. If you’re in this position it could well be worth searching out a fixed rate savings bond with a 2-3 year term to protect yourself over the coming years as I definitely can’t see rates going up for some time yet!
Will it make a difference to the economy?
If the massive drop to 0.5% couldn’t spur growth in the economy it’s difficult to see what a further drop of 0.25% or 0.5% will achieve. Any money that it puts into the pockets of those on tracker mortgages may well be taken straight out of the pockets of savers, meaning no more real money being spent on the high street which is where it’s so desperately needed at the moment!
Are there any dangers in dropping rates further?
The are many threats posed by dropping rates further. The main ones we are interested in as consumers though are
Inflation is and has been above its 2% target for some time now! The worsened economy hasn’t been able to stop inflation it in its tracks. A further rate drop could cause it to rise again. This would again erase any gains borrowers would see from the rate drop as they’ll be paying more for the things they buy!
Another big fear is that we all become that used to living on low interest rates that we start to view them as normal. They’re not normal, they are historically low! People tend to live to their means, if interest rates stay too low for too long we may financially commit ourselves in a way that we cannot afford to sustain when interest rates rise again! This could put us in another crisis just a few years down the road.
So would another interest rate cut be a good or bad thing for you?
Tell us your thoughts!