Bank of England Base Rates
The Bank of England base rate is the UK's official rate of interest. It acts as the benchmark lending rate, which major banks and building societies will incorporate into their own interest calculations. One of the Bank of England's core purposes is to monitor and maintain the stability of the economy, and it is through establishing a base rate that it aims to control inflation and facilitate the recovery of today's ailing economy.
Although it might be expected that a cut in Bank of England base rates will mean immediate good news for borrowers, the setting of the base rate should be seen not as a direct instruction to lenders but rather a guideline suggestion. Banks do not have to implement this new rate in their mortgage deals and often will not; the base rate is just one of the variables that lenders will take into consideration when setting rates.
Part of the reasoning behind lenders' reluctance to pass on the base rate is that it is too risky, in the current economic instability, not to retain some of the margin between their rates and the Bank of England's as profit for themselves. Also, the very nature of lending presently poses a risk because of the nationwide financial strain; lenders have lost confidence in the certainty of a return on their money. Furthermore, the amount that is paid out by banks in savings interest rates needs to be balanced by the return they get on any lending.
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