News & Features


Five years since the Bank of England cut the base rate to just 0.5%

Well it's five years to the day since the Bank of England's Monetary Policy Committee cut the base interest rate to just 0.5% on 5th March 2009 and it's been there ever since.

In the previous 18 months the financial crisis had seen Northern Rock nationalised, RBS, Lloyds and HBOS rescued by massive taxpayer bailouts and Lehman Brothers collapse in the United States. In response to the crisis from October 2008 it took just five months to slash the base rate from 5% to 0.5%, its lowest level for 300 years.

Homeowners and businesses have now enjoyed five years of low rates on their loans, but savers have suffered pretty meagre returns on their deposits. 

In a feature on BBC Radio 5 live, the two sides of the argument put forward their views: Anna Bowes founder of Savings Champion, a website offering comparisons on savings rates and David Hollingsworth, a mortgage adviser at London & Country Mortgages.

Anna was asked what rates can you get for savings right now after these years of very, very low base rates?

Anna Bowes responded: "Very, very low rates I'm afraid. Easy access at the moment is around 1.4%-15% for the very best rates that are currently available for new savers so it's really poor. If you invest for up to 5 years you can get 3.25%, but that's locking your money away for 5 years so people are going to start considering that. "

So for the instant access accounts in real terms you're actually losing money by having it in the bank so you might as well spend it!

Anna Bowes: "Well people need to save money, there's no doubt about it so they've got to put it somewhere and unfortunately there isn't really an alternative because at least putting some funds aside means that in those emergencies they don't need to get themselves into further debt so it is really important. But you're right, there is little incentive to save but it's just so important that people do. "

Leaving aside free bus passes, it's pensioners that have been particularly badly hit by the low level of interest rate for five years and of course, as you say, inflation is eroding that. But also they've been hit by price rises haven't they, a larger part of their income goes on things such as heating, electricity and gas. They've been sort of caught in a double pincer movement.

Anna Bowes: "Yes exactly. We hear about how inflation has fallen recently but that just means that the rise in prices is going up slower, it doesn't mean that they're coming down in value and for the pensioners who rely on the interest they're earning it's simply halved. The amount of money they're getting has halved and it's absolutely desperate. "

David Hollingsworth from London and Country Mortgages was asked, if you're a borrower rather than a saver then you've done very well haven't you?

David Hollingsworth remarked: "Well there have been some winners and some losers. If we take it back to when base rate did start to plummet, availability dried up so for first time buyers and the like it became a very difficult marketplace. Really only in the last two years has it really started to improve so funding for lending kicked off more competition and happily now we do have some extremely competitive rates so if you were going for the other side of the coin and were looking to fix your mortgage for five years you would be able to get just under 3% these days. " 

Do you think also that the mortgage providers were caught in a double pincer movement as well in that they had to make an offer for mortgages but the fact that they had to ask people for a greater deposit and they were subject to greater regulation meant that the business wasn't there anyway?

David Hollingsworth: "Yes, the big changes were that availability dried up, it became a lot harder to qualify for a mortgage and that's why you had the headlines showing people who were desperate to get a mortgage but finding it very difficult. Prices and margins increased massively because the cost of funding leapt and criteria is still a lot tighter than it was if we go back to the absolute peak of 2007. There's much tighter criteria in place and you will pay more still if you have a smaller deposit, it's just that the rates have improved as competition has improved in the market. "

Justin Urquhart Stewart, founder of Seven Investment Management (7IM) was asked what five years of 0.5% base rates done to the economy?

Justin Urquhart Stewart responded by saying: "Well I suppose what you're trying to say is has quantitative easing worked and it's a conversation we've had on Wake Up To Money over that time. The answer is well we're still here , so to that extent it has worked because five or six years ago we were teetering on the edge of financial armageddon and it really was very dangerous. However, what we've seen is that we've got low rates so low rates of mortgage - that's been good for those people - and we've avoided deflation. Now we're British, we're used to inflation we're not used to deflation, but if you look at the Japanese economy, deflation has been deadly for them and only now are they possibly coming out of it. The bad news is we've had bubbles - some would say bubbles in property and certainly bubbles in emerging markets as we've seen in the past month or so, so yes it has certainly helped when your money supply disappears putting more money in provided us with the opportunity to make sure the system kept going. Had you not done that we could have found ourselves in a position where we could have been entering another depression. "