Your Questions About Uk Banks Interest Rates

Lisa asks…

UK interest rates?

Following the announcement from First Direct that they are suspending morthgages for new customers, 2 individual banks have raised the interest rates associated with their mortgages.

If these banks are allowed to do this, what is the point of the Bank of England lowering base rates in the first place? If the banks aren’t obliged to follow suit, isn’t it just an exercise in futility?

Pip answers:

When the Bank of England changes the official interest rate it is attempting to influence the overall level of expenditure in the economy. When the amount of money spent grows more quickly than the volume of output produced, inflation is the result. In this way, changes in interest rates are used to control inflation.

The Bank of England sets an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.

A reduction in interest rates makes saving less attractive and borrowing more attractive, which stimulates spending. Lower interest rates can affect consumers’ and firms’ cash-flow – a fall in interest rates reduces the income from savings and the interest payments due on loans. Borrowers tend to spend more of any extra money they have than lenders, so the net effect of lower interest rates through this cash-flow channel is to encourage higher spending in aggregate. The opposite occurs when interest rates are increased.

Lower interest rates can boost the prices of assets such as shares and houses. Higher house prices enable existing home owners to extend their mortgages in order to finance higher consumption. Higher share prices raise households’ wealth and can increase their willingness to spend.

Changes in interest rates can also affect the exchange rate. An unexpected rise in the rate of interest in the UK relative to overseas would give investors a higher return on UK assets relative to their foreign-currency equivalents, tending to make sterling assets more attractive. That should raise the value of sterling, reduce the price of imports, and reduce demand for UK goods and services abroad. However, the impact of interest rates on the exchange rate is, unfortunately, seldom that predictable.

Changes in spending feed through into output and, in turn, into employment. That can affect wage costs by changing the relative balance of demand and supply for workers. But it also influences wage bargainers’ expectations of inflation – an important consideration for the eventual settlement. The impact on output and wages feeds through to producers’ costs and prices, and eventually consumer prices.

Some of these influences can work more quickly than others. And the overall effect of monetary policy will be more rapid if it is credible. But, in general, there are time lags before changes in interest rates affect spending and saving decisions, and longer still before they affect consumer prices.

We cannot be precise about the size or timing of all these channels. But the maximum effect on output is estimated to take up to about one year. And the maximum impact of a change in interest rates on consumer price inflation takes up to about two years. So interest rates have to be set based on judgements about what inflation might be – the outlook over the coming few years – not what it is today

The commercial banks set mortgage rates and savings rates in order to make a “profit”. “Profits” reduce, or are expected to reduce, when delinquency increases (loans are defaulted on). This requires commercial banks to increase the rate they charge relative to the rate they can borrow.

As savings get withdrawn from accounts in a recession (due to lack of income), so the competition for savings increase. In order to maintain liquidity a bank has to keep its savings customers stable relative to its mortgage book.

Banks operate in a competitive market, not a closed economy. This means if they were overcharging, relative to the default rate, and at a very profitable cost, a competitor would appear in the market place and take all the business away from them.

What has happened is that competition has been fierce, and some banks have gone too far in trying to obtain market share (Northern Rock for example)

Even if the BOE did nothing, I would expect mortgage rates to rise and competition for savings to increase. Many banks do not want any new mortgage business, at any cost. They would really like your savings.

Banks can do what they like, provided they accept the consequences on their reputation and their position in the market place.

First Direct is a marketing name for HSBC. To temporarily suspend new mortgages in this way saves customers, brokers and other people wasting their time filling in forms.

To keep a book balanced, you can either price yourself out of the market, or just waste people’s time by pretending to be in the market but reject all applications. Which is better for your brand name?

I would guess that it depends on the period of temporary suspension. If you expected 1-3 years then it would be best to announce that to the market place. If it were only for a few months, then it might be best to keep quiet. If it was permanent, then “What business is a bank in”?

It is closed, and not an ongoing concern if it is permanently closed to new business.

Joseph asks…

Wont Lowering Interest Rates Just Hurt The Public But Help Banks ?

Lowering the Bank of England base rates, will have no effect on the price of mortgages, because the mortgage companies will not pass the benefits on to their customers.
Banks will use the percentage cut to refill their vaults, which have been emptied by the credit crunch.
An interest rate cut ultimately costs the public, and could cause a rise in the inflation rate.
Should the UK‘s fiscal policy use other measures to increase the flow of money in the financial system ?

Pip answers:

Here is the rub. The credit crunch was not caued by high interest rates. So lower them will have no effect.

As for all these people coming off fixed rate and not being able to afford the new repayments that is because their mortgages are pegged to 3m libor. Which is fast approaching 6% and increasing.

Inflation is also being primarly driven by the cost of fuel, petrol, utilities, food. The BoE has no effect on these.

Mary asks…

UK Interest Rates?

Will the Bank of England raise interest rates today, leave them unchanged, or lower them? What signal will this send to the economy?

Pip answers:

I think they will go up 1/4 % today…… Gas prices and house prices will force the rate up I think in order to keep inflation under control. If they don’t rise today then they certainly will next month.

Michael asks…

which bank in the uk offers the best interest rates on isa accounts?

for instance if i had 10.000 pounds and was looking to invest it what would be my best option and how much money would i make back over a 3-5 year period
im new to all this how much money would i make bak over 1year if i was to invest 3.500 in an isa with interest rates of 3.0 percent thanks for reply

Pip answers:

Have you looked at or money supermarket, I like abbeys 3% deal but with a variable rate, most good ones have a 1 year bonus and your have to remember to switch afer a year.

Steven asks…

UK interest rates still being used as a political tool – Brown said it’d stop with Bank of England autonomy?

Mainly ver good answers here, thanks.

Pip answers:

Gordon brown IS the very man who got us into this mess, don’t believe all the nonsense coming out of downing street with regards to america. HE controlled the purse strings for 11 years. He took all the credit with gay abandonment, when it was all good and dandy, remember his immortal words ‘no more boom and bust’ 1 year later unemployment is going through the roof, people are losing their homes, no jobs,no money. Now that proverbial shite hit the fan, he has shifted all the blame on america.
Just watch him in prime minister questions, its like watching him on loop, the guy has no idea whats really going on!

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