New 1% loan rate is lowest in history

The Bank of England today slashed its interest rate to an all-time low of one per cent.

The fifth consecutive cut in the official cost of borrowing came as the Bank warned of a "severe and synchronised downturn" in the world economy.

The 0.5 per cent cut will help about four million borrowers — including 600,000 in London — on tracker mortgages that automatically fall or rise in line with the Bank's rate.

Up to two million more on variable rate deals will also see a reduction in their monthly bills as major lenders such as Halifax and Nationwide said they would pass on the cut in full.

In total, around half of all mortgage holders should see some benefit.

However, there was anger from savers who said the latest move was the "final nail in the coffin" for people who rely on income from their nest-eggs. On another front, controversy was raging over moves to give bonuses to bankers who contributed to the financial meltdown.

The new one per cent rate is the lowest in the Bank's 315-year history and has plummeted from five per cent since October.

The Bank hopes that lower borrowing costs will help bring an end to the worst recession in 28 years by encouraging businesses to invest, consumers to spend and first-time buyers to goback into the property market.

For around 1,500 borrowers with Cheltenham & Gloucester who have tracker deals at 1.01 per cent below the base rate, their interest bill is now effectively zero.

C&G said its computers could not cope with a zero interest rate and borrowers would be charged 0.001 per cent, or 8p a month for a £100,000 home loan.

Borrowers on variable rates with major lenders including Halifax, Nationwide, and Lloyds will also get the benefit passed on in full.

But borrowers with other lenders on variable rates are likely to get only part of the benefit. Anxious savers were waiting to see how far rates on their accounts would be cut.

Before today the average rate on instant access savings accounts was 1.07 per cent but this is now likely to fall to about 0.6  per cent.

Independent financial adviser Simon Hodge said: "For savers, and pensioners in particular, this latest cut in the base rate is another major blow. While the banks may not pass on the reduction to borrowers, it's a safe bet they will pass it on to the beleaguered saver.

"In extreme cases, this could result in accounts paying zero interest, and where these accounts charge a monthly fee they could, in theory, generate a negative return."

Louise Bond, Personal Finance Manager at comparison website uSwitch.com said: "Today's base rate reduction could be described as the final nail in the coffin for savers.

"This means that people with the average savings balance of just under £3,000 will get less than £10 a year in interest — a minimal return."

But some City economists said the Bank had no choice but to cut rates again. Stuart Porteous, head of RBS group economics, said: "Putting a floor under the fragile economy remains priority number one. The UK's eight million net savers will have to play second fiddle for now.

"The Bank is quickly running out of wriggle room on rates. Other weapons in the Bank's arsenal are now being readied for the offensive — buying assets first, printing money second."

ING Bank economist James Knightley said rates could fall even lower, to 0.5  per cent, in the months ahead.

Other experts were sceptical about whether the today's cut would do anything to stimulate the economy.

Andrew Hagger of financial website Moneynet.co.uk said: "You really have to question if there is any point in pursuing this panic driven, rate-slashing strategy, as apart from the fortunate minority on a base rate tracker mortgage, everyone else, whether they are a saver or borrower, is getting a poorer deal." However, property experts said the rate-cutting may produce the first green shoots in the property market for 18 months.

Peter Rollings managing director of estate agent Marsh & Parsons, said: "We've already seen the impact of the Bank's last cut — Marsh & Parsons registered more than 1,000 new buyers in January alone. Renters are demanding six-month break clauses in their leases so they can get out quickly to buy at the floor of the market — the number of buyers with secure mortgage finance was noticeably higher last month."