On the 6th of November, an unprecedented meeting took place involving the Bank of England’s monetary policy committee. At that meeting the bank decided to drop their interest rates by a huge 1.5%, bringing interest the interest rate to the lowest level seen since 1954. The rate currently sits at 3%.

However will it make any difference to the market at all? I am sad to say that in my humble opinion I don’t think it will. It is my belief that lenders in the UK are fundamentally unable to reduce their lending rates by 1.5% and that is just considering this recent rate cut. Most lenders if not all of them have failed to pass on the last rate cut and are currently holding their standard variable rates at a rate which is some 6 months out of date now.

The problem that most lending institutions have both here in the UK and around the globe is even though bank base rates have reduced the cost of funds from bank to bank has not fallen at the same rate. The rate at which financial institutions in the UK lend to each other is called the LIBOR rate which stands for the London inter-bank offered rate. Whilst LIBOR has come down very slightly over the last few months it is quite considerably out of sync with bank base rates. So even though money appears to be cheaper it is not.

The LIBOR rate is dictated by the willingness of the institutions to loan money to each other. Due to the onset of the credit crunch and the fact that the poor lending policies of the institutions have come to light, there has been an unwillingness to lend between the institutions and this has a knock on effect on the LIBOR. They all know about each other’s shoddy lending policies of the past and, due to the down turn in the economy, they do not want to expose themselves any further.

You might have thought that the huge injection of capital from governments both here and abroad would have oiled the system but let me tell you this is far from the case. I am unsure why, there are rumors that lenders have been told that as a condition of the injection they have to lend a set percentage more next year than this year and as such they are saving themselves for that mandatory position but who knows. All I know is there is very little money out there, what is there is at low loan to values and the rates are poor.

One thing the Bank of England’s decision will more than likely do is raise confidence levels. The public will think that low interest rates mean that things are on the up. However, they may soon realize that this is not actually the case when they see that their lenders are not passing on this decrease to them or to their mortgage payments. We should, however, see commercial finance improve as most commercial finances are set at a slight rate above the actual base rate. This should mean that deals done in the past should see a benefit from the drop.

Irrespective of that, a lot of commercial lenders have bumped up their over base rate level to preempt any new customers looking to borrow. Equally, some lenders have already withdrawn their base rate tracker level or increased it so as to eliminate any possible risk of losing more money. After such a huge single cut in rates, and looking at the action being taken, it makes you wonder if these lenders actually saw it coming!

So what effect are we looking at, if any? Well, to be frank, in the short term we are probably looking at very little change at all. But still we have to believe that over time the positive knock on effects of this drop in the base rate simply have to reach down to the people on the ground. Otherwise we are facing a very bleak financial future indeed.

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