Interest rate cut from 4.5 to 3 % [shock]

[morningpaper]

Bank of England just announced 1.5% cut

We have a tracker mortgage - about £300 a month better off now, wow!

Well done. Some trackers are linked to LIBOR and not BoE rate but libor feel approx 1pc on Friday. But note that Libor tends to be more volatile. Looks like banks will mostly do trackers against libor in future so those who are tracking BoE enjoy.

I think ours tracks BofE at present. Don't really follow it all; I am lazy and leave it to DH. Just know that as of last week we have more money to play with - well, in reality we are just paying same mortgage but paying it off more quickly (does that make sense?) but feels better.

Atleast this banking crisis has made public more financially aware. My DS9yrs now knows much about liquidity, banking rescue, shareholder capital etc thanks to the crunch

Hilababy- given uncertainty of other investments plus tax advantage, it makes much sense to apply your extra capital to paying mortgage faster.

For those who want to "bottom fish" in the stock market, I wouldn't be a buyer of the FTSE above 3800 maximum. We could see as low as 3500 or lower; who knows

ToughDaddy - What do you do in RL? I'm asking because you suggest you work in finance and yet you say things that leave me scratching my head, like:

"banks could KEEP the same margins if Libor moved in line with BoE rate. And at the same time reduce the default rates of businesses."

LIBOR has nothing to do with rate of default of businesses, who do not borrow at LIBOR.

Banks' lending rates to businesses and persons will not decrease in line with BoE rates either, because risk premiums have gone up not only because banks realised they can't lend to anyone and everyone, but also because we are in a recession and borrowers are more likely to run into problems and go bankrupt and hence be unable to pay back their debts.

" they need reduce libor in line with BoE rate like it used to. But that is not happening on the "free mkt", hence intervention by the govt."

LIBOR has decreased in response to lower BoE rate, but it is naive to expect this decline to be proportional.

And there has been no 'intervention' to LIBOR by the government, and there can't be one while the 16 bank that determine it are private entities, so what are you talking about?

CoteDAzur- not so long ago LIbor used to move in line with BoE rate and the financial mkts worked better because policy makers could control money supply using BoE rates. The fact that this isn't happening is a big part of the problem.

At a high level you can say that banks earn a net spread from their borrowing and lending. What I am saying is that the economy would have a softer landing if all of the following rates were lower:

1)banks customer lending rates
2)libor
3)BoE rate

Until recently, these all moved broadly in line preserving the NET SPREAD that banks earn. Now what the Govnor and the chancellor are aiming for is for 1) to be lower thereby reducing default rates of customers. if 1), 2) and 3) move in line then the banks' net margins stay the same and default rates are reduced so banks are better off. So that is why lower libor rates implicitly affect default rates of businesses and other customers

BoE has less control over money supply since it stopped determining banks' reserve ratios in 1981. Maybe that is the "until recently" you are talking about. But BoE didn't do this through interest rates at all.

As for LIBOR following BoE rates and lending rates following LIBOR, thereby customers borrowing at much lower rates - When you talk about "keeping the spread", you miss an important point: The risk is higher (with liquidity crisis and recession/higher risk of default) and therefore spread has to be higher.

Which is what we are seeing now. Banks are not irrational and their management is not being stupid. They are acting in self-interest (which is how capitalism works), and not in the interest of the general economy. That is the job of BoE.

"The risk is higher (with liquidity crisis and recession/higher risk of default) and therefore spread has to be higher."

My point is that the risk becomes lower if customers interest rates are lower, surely. That is one of the main points that I am making. We should have learnt this from previous recessions.

" The risk is higher (with liquidity crisis and recession/higher risk of default) and therefore spread has to be higher"

Lowering the risk aot to trying to increase the spread is the solution. Plenty examples of spread increasing triggering further default.

"Banks are not irrational and their management is not being stupid. They are acting in self-interest (which is how capitalism works).."

Capitalism isn't always rational. The reason I mentioned "prisoner's dilemma" is that we have one of those situations where what appears rational for the bank actually turns out to be sub-optimal for the system and therefore for the bank. That is why govts are having to intervene to bring about a more rational solution for the banks and the general economy.

There are many examples of banks bursting bubbles too quickly

there are, of course, examples of banks acting in a more "market orderly" way. For example, commercial property lenders are NOT generally calling in loans where there are technical breaches in loan covenants providing that loan interest in covered.

If the US govt had stepped in and enforced diff behaviour US banks would not have done so badly in the US housing loan crisis. The avalanche caused by banks enforcing default when people couldn't afford increased mortgage rates ended up hurting the same banks very badly. If the govt and the banks had worked together to "fix the market" some of this could have been avoided and it probably wouldn't have spread to all sectors, all countries. Another example of an apparently rationale action turning out to be sub-optimal.

Yes, I work in the financial markets, but I have no problem owning up to its limitations.