Sunday, July 26, 2009

The truth about Bank interest rates.

Some people are having a go at the banks for the interest rates they charge, particularly as the Bank of England base rate is at 0.5%.

People claim that the banks are making a big profit by charging interest rates of 4.5% and above when the Bank of England rate is so low.

The problem is, as I have said before, that no one cares what the dreamers in the Bank of England set interest rates at, no one is lending at that rate, particularly to banks. They are not even close to that rate to the government. Banks are paying much higher rates for the money they buy in to lend so are charging more for it. It is as simple as that.

The fact that the Bank of England is in cloud cuckoo land will however cause real long term problems.

The BBC has this.


Brian E. said...

Journalists, particularly left wing ones, rarely understand finance. Banks can only lend at a higher rate that they borrow, something that people (deliberately?) fail to understand. I have currently money invested in an account offering a fixed 4.2% for the next year from one of the government supported banks. If they lent it out at any less, there probably would be screams that I'm taking taxpayers' money. If they paid much less, I'd probably go and buy a few thousand US dollars in cash and put them in the safe!
So there is a choice; Generally available mortgages at sensible interest rates if you can afford them, or mortgages at say 1% above base rate, but "sorry, there's a long waiting list". Which is to be preferred?
Incidentally, I've never understood why we should have an interest rate set by the Bank of England, the inter-bank rate is an indicator of how the markets work in a commercial world, and should be enough. I think it's government ploy to keep the rates they pay as low as possible on National Savings and the like.

Timothy (likes zebras) said...

Blog spam comments are becoming more sophisticated...

What is the Bank of England Base rate for? I'd imagined that it was some facility for the banks to deposit/borrow money from the Bank of England, and so would have a knock-on effect to the rates that commercial banks would charge their customers.

Mortgage rates are at pretty low levels, even when you consider that the banks have increased their profit margins.