Building Societies warn against January base rate cut

| February 2, 2009 | 0 Comments
Building Societies warn against January base rate cut

The Bank of England has been cutting the base rate aggressively since the autumn of last year and homeowners on tracker rates are becoming used to an almost monthly drop in the cost of their mortgage repayments.

The Bank’s Monetary Policy Committee meets again this week amid speculation that the base rate could fall to 1% in January, in a further attempt to rescue the economy from a severe recession.

However, the Building Societies Association (BSA) is calling on the Bank to leave the base rate at its current level of 1.5% as a cut could further undermine the savings market.

Unlike many banks, building societies rely heavily on retail deposits to fund their businesses, rather than the money markets.

The Government is desperate to encourage mortgage lending and halt the fall in house prices and the BSA is pointing out that a further cut in the base rate now could restrict its members’ lending abilities because savings rates would also fall.

According to the BSA’s director general, Adrian Coles, returns from savings have declined by almost 75% since the base rate began its descent from 5.75% in 2007.

Mr Coles explains that “a further reduction now will make people even less likely to save and disrupt further the flow of funds into the mortgage market, which is already significantly short of lending potential”.

BSA figures show that building societies and their subsidiaries were responsible for 62% of net lending in the fourth quarter of 2008.

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