Bank Cuts Rates Again - to 2%

The Bank of England this week cut

its Bank Rate again - from 3% to 2%. The cut comes directly after last month's 1.5% cut and signifies that the risks from inflation have been replaced by the risk of deflation.

In a statement, the Bank said, "there remained a substantial risk of undershooting the 2% CPI inflation target in the medium term" unless interest rates were cut - hence their decision.

Will Mortgage Rates Fall?

Although mortgage rates are not directly linked to the Bank Rate, it seems likely that political pressure on mortgage lenders will ensure that most variable mortgage rates do fall.

Several major lenders have already announced cuts to their Standard Variable Rates (SVR), although not all of these are passing on the full 1% cut. Several lenders have also announced that they will be letting their tracker rates fall below the minimum threshold at which they are obliged to track the Bank of England rate.

Good News All Round?

While falling rates are undoubtedly good news for hard-pressed borrowers and homeowners, savers and those - like pensioners - who depend on their savings for their income are being crucified.

Savings interest rates have fallen steadily since the Bank of England started cutting interest rates and are now reaching levels so low that it is difficult for basic rate taxpayers to ensure that their savings beat inflation.

The other downside of falling savings interest rates is that it is likely to reduce the amount people save - making it difficult for mortgage lenders to build up their capital (cash) reserves again. This in turn could result in limited mortgage availability, as explained by Ray Boulger of mortgage brokers John Charcol:

"The amount of money being deposited with banks has been falling as the interest rate comes down. That reduces the amount of money available to offer as mortgages."