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Can Someone Explain Why The Boe Interest Rate Matters

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Looked on the WIKI and nothing about this.

Looked at http://www.futuresource.com/quotes/quotes.jsp?s=LSS

and Dec 06 is now at 4.86% (though I believe this price includes some pricing for risk).

What does the base rate of 4.5% actually mean?

Can someone explain to me why the lenders have to move their loans (and savings) up and down with the BoE interest rate? If loans are just a market why can't lenders do what they think the market will bear?

Thus should we be more interested in what mortgage company rates are than in the BoE interest rate?

May have been discussed before but i missed it!!

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Looked on the WIKI and nothing about this.

Looked at http://www.futuresource.com/quotes/quotes.jsp?s=LSS

and Dec 06 is now at 4.86% (though I believe this price includes some pricing for risk).

What does the base rate of 4.5% actually mean?

Can someone explain to me why the lenders have to move their loans (and savings) up and down with the BoE interest rate? If loans are just a market why can't lenders do what they think the market will bear?

Thus should we be more interested in what mortgage company rates are than in the BoE interest rate?

May have been discussed before but i missed it!!

I suppose only in the sense that we have many "Tracker" savings and mortgage products available yo us these days. But I beleiev in general you are right, the market sets rates for mortgages over the longer term (fixed etc..) and these rates have ceertainly been rising without the BOE doing anything.

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The Bank of England base rate is the over-night rate, i.e. they lend to commercial banks at 4.5% (currently), they then lend to us customers at that rate plus their margins (a % plus all the other stealth charges).

If you want a fixed rate deal the lender will sell it on to the markets. Currently the lender can buy at the swap rate (e.g. the future source website). Although, I think there is a huge lag - i'm not sure if lenders buy lots in one go or what.

There's an article on it in today's Telegraph.

Edit: The real question is what happens if the markets show swap rates at 5%, yet the BoE rate is, say, 4%. What happens then?

Edited by Jason

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So what proportion of the money that gets lent to buy houses is lent by the BoE and what proportion from savers etc?

Do the BoE really lend money? ie print it and lend it out??

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it's the minimum lending rate.

nobody can lend money out at a lower rate than the base rate (by law).

under 5% is considered as free money in the markets.

Edited by slapkirsty

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it's the minimum lending rate.

nobody can lend money out at a lower rate than the base rate (by law).

Are you sure? I never knew it was law. The portman has a fixed tie-in mortgage at 1.79% Link.

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Are you sure? I never knew it was law. The portman has a fixed tie-in mortgage at 1.79% Link.

if it's not law then why have it.

I thought it was minimum variable lending rate. lenders can have temporary fixed discounts.

Edited by slapkirsty

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if it's not law then why have it.

I thought it was minimum variable lending rate. lenders can have temporary fixed discounts.

It's not law at all. If a bank wanted to lose money it can...

The interest rate is the variable 'over night' rate that is lent to other financial institutions and banks. Link.

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Looked on the WIKI and nothing about this.

Looked at http://www.futuresource.com/quotes/quotes.jsp?s=LSS

and Dec 06 is now at 4.86% (though I believe this price includes some pricing for risk).

What does the base rate of 4.5% actually mean?

Can someone explain to me why the lenders have to move their loans (and savings) up and down with the BoE interest rate? If loans are just a market why can't lenders do what they think the market will bear?

Thus should we be more interested in what mortgage company rates are than in the BoE interest rate?

May have been discussed before but i missed it!!

The BoE decides what the interest rate should be, it then manipulates the money market in a way for the interest rates to change in the way they want, by lending or borrowing more to commercial banks, I suppose as the banks are in competition they will want to lend as close to this value as possible whilst also making money themselves.

Here is a good article explaining this.

This is another article which explains the true value of money.

Here is a quote from the article which Gordon might be a bit miffed with

The impossibility of perpetual growth

Continuous economic growth is impossible in a finite world. True, some people believe that

growth can be made environmentally harmless ('angelized' to use Herman Daly's term) by being

stripped of its energy and natural resource content, so that it is capable of being continued

indefinitely. But this is a pipe dream. :D

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I thought I would add a bit more to this thread, and ask if it can be moved to the Economics forum (so it doesn't fall into a black hole).

Do the BoE really lend money? ie print it and lend it out??

The way I understand it all is the BoE (The UKs Central Bank) lend money to commercial banks at the rate they set (4.5%), there is no limitation on the amount of money lent (i.e. create out of thin air) - which is identified in the M4 Money figures (the broadest measurement).

The commercial banks then lend to the public at that plus their margins.

The commerical banks also lend out fixed loans, but they can't get a fixed loan from the BoE, so they borrow from the financial markets, those willing to lend at fixed rates (e.g. pension funds). The rate they demand changes all the time and can be seen on Futuresource.

So what proportion of the money that gets lent to buy houses is lent by the BoE and what proportion from savers etc?

I'm not too sure what the answer is to be honest as I'm sure it depends on the individual banks. Banks can practise fraction reserve banking (start another thread in the economics forum if you want) and have to have at least 7% reserves (I heard 7% being mentioned on here, can anyone confirm it is 7%?). So the savings from savers would form part of those reserves. I don't think a bank can borrow more from the BoE if it means the reserves fall below this level.

The interesting thing about the fixed rate deals is home buyers would tend to go for variable rates (discounted, tracker etc) as they would be cheaper than the fixed rates available. This means their lending rate change as the BoE change the base rate - quite a shock if you have an over stretched variable rate mortgage and don't expect rates to rise. Infact, isn't this happening in the US when everyone went for variable rates as they were so low compared to fixed rates..?

What I think is more imporant about these fixed rate deals vs variable is what happens if the BoE don't change rates that are expected by the market. I guess Sterling would fall as everyone sells... Anyone care to answer?

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Guest Charlie The Tramp
The Fractional Reserve Banking System

The privately owned high street banks do not lend out their saver's deposits as loans to those customers who wish to borrow. They never have. Instead these deposits act as a reserve on any calls that banks have on their money over and above the normal in-flow of funds. It is called their fractional reserve.

Instead of lending actual cash money to borrowers, the banks have only ever lent 'credit'. However, this credit is used by individuals to buy homes and to spend through their credit cards, overdraft facilities and arranged loans. It is also used to run businesses, to pay employees and suppliers, who further use it to run their own finances. Governments borrow it for public spending when income from taxation is insufficient.

This bank-created credit now forms some 97% of the British money supply (with similar ratios affecting all the world's major economies), and it has effectively become money. If a person borrows, say, £100,000 from a bank to buy a house, they regard that sum as money. It gets paid into the vendor's own bank account and they also regard it as money and spend it as money.

The amount of credit lent as a proportion of money held on deposit has always been a matter for nice judgement by the individual banks. The more they lend the more profit they make, but the more exposed they become, if too many customers want their money back in the short term. During the 18th and 19th centuries, private banks often collapsed due to a 'run on the bank'. Nowadays, the banking system as a whole tends to rally round to prevent any one bank collapsing, if only because they are all so bound up with each other.

So by the 20th century a figure of 15% was established as a suitably 'safe' exposure - the prudent fractional reserve. This meant that for every £100 that a bank had out on loan, it had £15 of savings held on deposit to cover the loan. This was the equivalent of a bank lending out each of its saver's deposits six times over. This was a fabulously profitable way of working, but it did at least impose a degree of constraint upon bank lending.

Bank de-regulation in the 1980s and the decline of the use of cash has ended even this modest constraint.

No Reserve

The use of cash has declined from 46% of the money supply in 1946, to 21% in 1972 and now down to 3% today, making this 15% 'safety' figure cease to have relevance. A reduction of cash to just 3% of the money supply suggests that the 'fractional reserve' of most banks has also fallen to a similarly low level. In other words, banks can and do lend to the amount of over 30 times their depositors' savings. To all intents and purposes, with such a tiny amount of reserve required and as cash is now so little used, there is virtually no restraint upon the amounts that banks may lend.

There certainly is no government control upon bank lending. The only influence by statutory authority is an increase in base interest rates by the Bank of England's Monetary Policy Committee when inflation rises, indicating too much money within the economy.

In recent years, despite the growth in the money supply, both interests rates and inflation have been at a very low level. This may be because, despite there being so much money in circulation, a large proportion is in use simply to pay the interest on the high level's of borrowing. It is therefore not available, as historically it would have been, to allow high levels of inflation to occur with 'too much money chasing too few goods'.

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OK ta jason and Charlie, seem to be getting somewhere!!

So sum up variable rate mortgages actually do depend on BoE rate as the money to supply the credit is borrowed from the BoE but fixed rate is borrowed from the money markets. So...............

What is the proportion of FR to VR money out there so if the money market rates go up and the BoE rate doesn't (due to fiddled inflation rate) do we get a nice crash!!?? ie is it out of the control of the BoE??

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OK ta jason and Charlie, seem to be getting somewhere!!

So sum up variable rate mortgages actually do depend on BoE rate as the money to supply the credit is borrowed from the BoE but fixed rate is borrowed from the money markets. So...............

What is the proportion of FR to VR money out there so if the money market rates go up and the BoE rate doesn't (due to fiddled inflation rate) do we get a nice crash!!?? ie is it out of the control of the BoE??

No... if fixed rates went up, they would not change for those who currently have fixed mortgage, because, well, they're fixed.

If everyone was on fixed rates, a crash would happen over a much longer time. But people tend to only fix for two years or so. Also, like what has happened in the US people think a variable rate is best when fixed rates are higher - so go on a variable rate not expecting variable rates to go up - then are genuinely shocked when they do.

What I expect to happen is fixed rates to climb higher, filtering through to fixed mortgage deals over the next 3-6months, the media/mortgage brokers will continue to say [the BoE] 'rate will go down', so new customers get variable rates. Then near the end of the year variable rates go up, and shock horror...

That's why I do expect a few more positive months HPI (hopefully small) because fixed rates are still low.

All IMHO of course...

Edit:

I don't know what ratio of mortgage is Fixed and what is not. Care to find out?

Edited by Jason

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Jason, ta for that.

I meant new fixed rate mortgages.

What i am interested in is if there is a real figure for the average mortgage rate on new mortgages and then this could be tracked??!! ie this figure would be going up even if the BoE base rate is the same.

However our old friend the short sterling continues to dip! which means something even if everyone disgrees about what!

http://www.futuresource.com/charts/charts.jsp?s=LSSZ06

Down again today.

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Fixed mortgage rate usually is affected by bond market/fixed income.

Financial market is no longer a striaght forward borrow and lending and saving equal sum. It's has become ever SO complicated with derivative and options trading.

Central bank has the power to tight the liquidity in system by rising interest rate. With cost of borrowing rising /rising interest rate, financal instutitions will have to charge more to lend. Because it costs them more to borrow for their lending. liquidity is related to interest rate movement.

In fact, Central bank has big power on monetary policy. Rising interest rate can slow down an economy. Over doing it can cause a recession.

Last August, B of England cut interest rate because they were afraid of a sharp slow down and a crash in house prices. Cutting interest rate to ease the money market/fixed income. Injecting more liquidity in the market. That means, if there are signs of economic weakness, BOE will cut interest rate to prevent the economy falling into recession.

Bond yield has been low. 10 year UK bond yield@4.6%. UK fixed mortgage are rather short term comparing to the US. The UK fixed mortgage rate is more related to the short term UK bonds/gilt.

Somehow investors believe there is no real threat of inflation and we are expecting inflation within the range of 2 to 3%. There is no fear in the market to push bond yield higher. With Asian central banks and pension funds keep buying US bonds, it keeps the US bonds yield low and that indirectly affects the globe bond market as well.

Recently global bond yield moves up, fixed mortgage rate also edges higher.

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heres a link thats worth a read about what drives rates.(US article though) it explains how investors drive rates and not the FED.

could be the same for BOE, if our currency loses value and investors lose faith then rates will rise to attract investment.

http://www.freemarketnews.com/Analysis/231...id=231&nid=4948

enjoy

Edited by debtfree

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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