Blog
Cheaper base rates but credit stays expensive
9th February 2008
Base interest rates might be falling in the UK but it would be a mistake to assume that the cost of servicing credit cards and other unsecured loans has become any cheaper - if anything, the price of borrowing money has edged even higher in the last few weeks. That is the inevitable result of the ongoing credit crunch which has caused lenders to tighten the hurdles borrowers must jump over before being granted loan finance.
Take the interest rate you might pay on a standard credit card. Borrowing on plastic typically accounts for around 20 per cent of total consumer credit and as we can see from the chart, credit card rates and debt-service costs for overdrafts and other unsecured personal loans are up to four times greater than the official base interest rate announced each month by the Bank of England. Perhaps the key point from a policy point of view is that quarter point changes in base rates will do little to materially change the effective disposable incomes of millions of borrowers in the UK> if the going gets a lot tougher in the weeks and months ahead, the Bank may have to be prepared to move the policy rate much lower to have a sufficient impact on confidence and demand.