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22 Saturday Dec 2012

Just how low can interest rates go? Posted by:

Just when we had grown accustomed to interest rates sticking at a record low of 0.5 per cent for months on end, it seems that there is a possibility that they might just edge lower. At least, that’s what the International Monetary Fund (IMF) is calling for.

Christine Lagarde, head of the IMF, ┬ásaid today that slashing the base rate might help boost the economy. She also called for more quantitative easing. Of course, with rates already at 0.5 per cent there isn’t much room for manoeuvre – the Bank of England could cut by a quarter point or go the whole hog and cut rates to 0 per cent. While this would incite howls of protest from already-squeezed savers, it is safe to say that borrowers on base-rate trackers will be absolutely delighted.

However, I can’t see it making much difference for the many borrowers sat on their lender’s standard variable rate (SVR). Indeed, several lenders, including Halifax, Clydesdale and Yorkshire banks, have increased their SVRs in the past month despite no move in interest rates. One suspects that many lenders would simply absorb the benefit of any rate cut, using it to improve their margins, rather than pass it onto borrowers. There is not much borrowers could do in such a scenario apart from vote with their feet and move to another lender – if they have the equity in their property and meet the criteria of a new lender, enabling them to do so.

While the news on inflation today is encouraging, with a surprise drop in the consumer price index to 3 per cent in April from 3.5 per cent in March – its lowest in two years – the economy remains weak. Times are tough for borrowers with a number of lenders announcing increases to their mortgage rates over the past couple of weeks, on the back of higher funding costs. The ongoing problems in the Eurozone are likely to further deter lenders who are already reining back on the volume of lending they are prepared to do.

These are difficult times. Further interest rate cuts would be highly unpopular among hard-pressed savers but welcomed by some borrowers. Would such a move boost the economy? There is only one way to find out.