Loans market may benefit from extreme base rate cuts
on: October 24, 2008, 9:50 am
Release Author: Melanie Taylor
Release Summary: Financial solutions company Think Money have
said that potential further base rate cuts suggested by some economists
could greatly benefit the loans market, but warned that lending
criteria may remain tight as lenders aim to protect themselves
from any further damage from unpaid debts.
Release Body: Financial solutions company Think Money have said that
borrowers and homeowners stand to gain from the Bank of England's
potential measures to tackle the economic crisis, but warned that
tighter lending criteria may remain in place to avoid any repeat
of the past year's trouble in the loan markets.
to The Telegraph, two leading economists have said that the Bank
of England may need to cut base rates to as little as 2% or even
1% in order to tackle the forthcoming economic crisis. That would
make the base rate its lowest since the Bank of England was established
Bootle, managing director of Capital Economics and a former Treasury
adviser, said: “It is critical to get rates lower - if the
medicine is not working you have to use a stronger dose,”
he said. “[The Bank] needs to get rates down far and fast.
need to be pretty bold. The lowest rates have ever gone is two
per cent. They could easily go lower than that now - why not?
After all, the Federal Reserve dropped [US] rates to one per cent.”
Alan Clarke of BNP Paribas said that he expects the base rate
to reach 2.5%, although it might be even lower. “One per
cent or lower is not impossible,” he added. “The important
trigger is the labour market: unemployment over, say, eight per
cent would be a disaster.”
a base rate cut would theoretically help to lower interest rates
on loans, a spokesperson for Think Money
said that the situation is not always that clear-cut.
drop in the base rate potentially makes loans cheaper, because
it reduces the amount of interest the lenders have to pay the
Bank of England for borrowing the necessary funds,” she
said. “Therefore, lenders can offer loans to consumers at
a lower rate while still making a similar profit.
the main obstacle to that is LIBOR (London Inter-Bank Offered
Rate), a measure of the rate at which banks are lending to each
other. Ordinarily this shouldn’t be too different to the
base rate, but currently it’s almost 2% higher – which
means that some funds for loans and mortgages are still quite
expensive to lenders.
in the base rate can encourage a lower LIBOR, but currently the
uncertainty in the loans market is keeping the rate high, as well
as prompting lenders to maintain their tight lending criteria.
Both of these need to ease up before the loans market can return
to normal – which is why extreme base rate drops to only
1% or 2% might be needed.”
Think Money spokesperson added that lending criteria
is unlikely to ease to allow anywhere near the levels of lending
seen during the economic boom. “Lenders will feel they have
learnt their lesson from the economic crisis and will look to
protect their loans business by keeping their lending criteria
possible that we could see numbers of secured loans return to
near-normal levels, since the collateral attached to secured loans
makes them a ‘safer’ type of loan from the lender’s
point of view. But in terms of unsecured loans, credit cards,
overdrafts etc., lenders will probably continue to pay close attention
to borrowers’ credit history.”
the spokesperson was also keen to emphasise that loans are still
very much available, and the availability will only increase as
the market recovers. “Some people assume that loans simply
aren’t available anymore, but that’s not the case
– it can just take a little longer to find the right deal.”
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