Friday, 4 December 2009
Further to today’s Base Rate cut, I saw some interesting analysis earlier this week from one of the Banks which predicted a fall in Bank of England Base Rate to 1% in the near term and for it to stay there until well into 2010. Certainly an aggressive call but I wonder if any of the clients that we deal with are likely to see the benefit?
If base rate fell this low, the remaining commercial lenders in the market that are lending on Base Rate are sure to take the opportunity to change the products that they offer to a LIBOR linked facilities. The monies that the lenders buy in through the interbank markets is all linked to LIBOR so further falls in Base Rate will mean that the lenders will be losing even more money.
This also doesn’t take into account the battering that Sterling has been taking lately and further cuts in Base Rate are likely to create even more pressure in this area.
Another factor that will affecting a number of clients are the minimum rate clauses in their loans. These do exactly what they say on the tin, ie. they are the minimum charging interest rate for that product. When Base Rate fell to 3% we had a number of calls from clients who wanted to know why their repayments had not fallen and it was because their minimum rate clause had been enforced.
The minimum rate usually includes the margin also and this will certainly affect a lot of people if the Base Rate falls to 1%. These are extraordinary times though and the minimum rates should be looked at in comparison with Base Rate over the last 25-years or so and a minimum rate of 4% or 5% is still historically low.