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Who Uses The Base Rate?

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So today the bank of England are going to announce the base rate decision.

But who uses that rate? I always thought that banks borrowed money from the Bank of England, at the base rate, to lend to their customers.

But recent events have shown I was wrong. If banks could borrow from the Bank of England at the base rate, then Northern Rock would not be in trouble. Apparently banks borrow from each other (or not, at the moment), not from the Bank of England. So who does borrow at the base rate, and if nobody does, why is the bank's decision relevant?

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Im no expert but the links are

government bonds



National Savings and Investments, individuals can bank with the government

Northern Rock


Government Spending/Salaries, lots of money going into the market ;p

Banks can also go to the BOE for emergency funding but they borrow money at 1%? above the base rate

Edited by moosetea

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Anyone who's come off a fixed rate deal and has too little equity to get another, or lied about their income on a self-cert deal or required more than about 4 times their income.

They'll all be using the base rate as most Standard Variable Rates are the base rate plus some extra points just to constantly remind you not to be a stupid c*** when you make the biggest financial commitment of your life.

Edited by Paddles

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So the NSandI borrow from the bank of england, all the time, without there being queues outside? How cheeky.

My question though is how does the rest of the market work?

Joe Public gets his mortgage from a bank at x%.

The bank gets the money, to lend to Joe Public, from other banks - presumbaly from overseas banks too, where people save more. Joe's bank can borrow at Y% (X% minus a bit for risk / profit margin).

The other banks get their money from deposits, on which they've promised to pay Z% (Y% minus a bit more for profit margin).

Now neither X, Y or Z% have any connection to the B of E base rate. Presumably there's a free market operating and the rates offered are determined by the competition?

So, if the Bank of England say that interest rates are now 1%, why would anyone care? The B of E are not doing any of the lending in the economy so how does their decision affect the flow of money? The banks lending money are still borrowing it from elsewhere, so they can still only lend it at X%.


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Broadly speaking the base rate began life as the rate at which the BoE would lend to its favoured borrowers - other banks.

Life is no longer so simple, so the base rate is now a starting point for the calculation of rates for many loans. Base rate + 2%, for example... which is set in the contract for the loan agreement. So when base rate moves, so does the contracted rate.

Businesses tend to relate loan rates to Libor which is much more representative of the free market.

Edited by Telometer

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