BSA: UK interest rate cut

Commenting on the announcement today by the Bank of England to cut the Bank Rate by 100 basis points to 2%, Adrian Coles, Director-General of the BSA said: "Homeowners will welcome the MPC's decision to cut the Bank Rate by 100 basis points to 2%. However, not all mortgage borrowers will find today's fall mirrored by their lender - building societies have to balance the interests of borrowers and savers. Although low interest rates are good news for borrowers, they are not so good for savers.

Savers will be disappointed at today's news. Building societies which "pass on" both this base rate reduction and the last could halve the interest which they pay to their investors in a very short period of time. A large proportion of the funds invested in building societies are held by those over the age of 55; building societies will wish to do what they can to protect pensioners from what will be, potentially, a very sharp reduction in their income.

More generally, building societies have a number of factors which determine mortgage rates, some of them much more important than the Bank Rate. They include trends in money market rates, competition in the savings market, the requirement to fund their share of the Bradford and Bingley and Icelandic bank bailouts, and the returns which they earn on their liquid, non-mortgage, assets. In addition, some mortgages also have "collars" below which the rate may not fall."