Monday, February 2, 2009

Don’t kill Savers – Please!

Societies oppose more rate cuts

The Building Societies Association (BSA) has called on the Bank of England not to cut interest rates this week. The Bank's monetary policy committee meets on Thursday amid widespread expectations of a further reduction in the cost of borrowing.

Posted by alan @ 12:11 PM (1206 views)
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11 thoughts on “Don’t kill Savers – Please!

  • The Bank of England has been bottling this problem for some time now, constantly kicking the issue into the long grass.

    Another rate cut could induce capital flight, further weakening the societies (and banks) and further weaken the pound leading to stagflation. No doubt Gordon Brown will be baying for the Bank of England to cut rates to zero – he instructed the banks to pass on the full rate cut to borrowers last time (rather than sharing it between savers and borrowers).

    Brown is desperately and misguidedly trying to destroy savers’ assets. Problem is, he is also punishing the more prudent building societies by forcing them to cut borrowing rates. Nationwide springs to mind, but there are other old fashioned mutuals being punished by artificially low rates.

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  • mark wadsworth says:

    It turns out that the official base rate always just used to track LIBOR. It is only over the past few months that this rule of thumb no longer holds. Charts here.

    Agreed, those on tracker mortgages are, in the short term, laughing, but remember that in the past couple of years you could get tracker rates of base rate plus or minus very little. Trackers that are coming out now tend to be base rate plus quite a lot. If the base rate ever goes up again, those who signed up to trackers in late 2008 and onwards will be in for nasty shocks.

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  • I can’t see interest rates being held this low for much longer, once retailers have flogged all their unsold stock cheap to get rid of it, their next lot of imported stock is going to cost a lot more, expect double digit interest rates soon.

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  • @mark wadsworth, the Base Rate didn’t track LIBOR, LIBOR tracked the base rate. Because LIBOR is a 3 month rate, and base rate is an overnight rate, LIBOR tracks what the market thinks the base rate will be over the next three months, so it moves before base rate does. Some times, of course, the predictions will be wrong, hence the blips in the earlier part of your chart.

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  • notaneconomicsguru says:

    I think we need a period of stability to see what the real effect of all these IR changes actually is. Usually it takes months before the effect of IR changes are seen on the economy. In the last 3 months big IR changes have happened so maybe not quite so much time is needed before effects are seen, but its surely far too soon to be able to understand all of the effects the IR shock has had. Am I right in thinking that a reason for continuing rapidly downwards to zero would be that if they see QE as the only way out?

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  • mark wadsworth says:

    @ Jonb. If it is true that 3 month LIBOR is the banks’ best estimate of the base rate over the next three months, then the fact that 3 month LIBOR has been about 100 bps over base rate for the past year means that the banks have been expecting the base rate to go up by 100 bps for the last year – and still they do, it would appear, and have been consistently wrong for the first time in the twenty years for which the info is available?

    I doubt it somehow.

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  • @mark wadsworth

    The other thing you can do is to compare LIBOR with 3 month gilt yield. It has traditionally been around 10bps above that, which reflects the risk premium of lending to banks vs lending to the government. Also the fact that you can sell gilts to other people if you need the money, but with a loan to a bank, you have to wait until the due day.

    The risk premium has now increased to somewhere in the region of 200bps, which is why LIBOR has diverged from base rate.

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  • I get why interest rate cuts aren’t always passed on to borrowers – because the banks actually have to pay the LIBOR rate on the money markets, not the Base Rate, but I don’t understand why Base rate cuts pretty much always get passed on to savers. Surely if a big part of the problem right now is lack of liquidity, then banks should be falling over themselves to attract borrowers by offering better rates?

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  • Tenyearstogetmymoney Back says:

    timmy t @8

    I wonder what percentage of Banks and Building Society deposits are
    in fixed rate accounts. A quick check on the Halifax web site shows
    you can still get 5% fixed for the next year in a Regular Saver account.
    A couple of months ago its was 7%
    After the first of the rate cuts I went in the Nationwide to change my ISA to a fixed rate
    and reckon most people in the queue were there to do the same thing.

    :- Duncan

    p.s. I have asked before if anyonhe can explain the significance of the BOE rate.

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  • yes timmy, (god that sounded patronising!!) you are right. They should be falling over themselves. But they also have to repair their balance sheets, and the easiest way to do that, as always, is to screw the little guy. They will steal from savers as much as they can, which is why I have been saying that if a significant number of savers removed their funds before valentines day, the banks would sit up and take note.

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  • inbreda – this is where the internet could be really useful. Savers should club together via a site (this one?) and take their savings to the highest bidder.

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