The Bank of England has heard the cries for help from the British public and made a mind-blowing one and a half per cent point cut in UK interest rates, the most dramatic cut in interest rates in Britain since 1981.  The cut brings the interest rate down to 3 per cent from a previous 4 and a half percent, the lowest it has been since 1955.

The cut clearly shows the banks realisation of the position the current economical slump is having on the country’s population and shows the bank’s concern that the country is heading further more into a recession.

Banks and mortgage lenders are now facing pressure to pass on the rate cut to borrowers and some banks have not decided how much of the cut they will pass on.  However the news is good for owners of small businesses as Barclays, HSBC and Lloyds TSB have announced that they will be pass on the cut “immediately” to the majority of borrowers.

The FSB (Federation of Small Businesses) said that the “unexpectedly large” cut would definitely be an “enormous” help to small businesses.

Chancellor Alistair Darling has made it clear that other banks need to take heed and follow in the example set by also passing on the full interest cut to their borrowers.  He said, “I think it’s essential that the banks do pass on the benefit of lower interest rates to people and to businesses.  Banks need to understand that they need to help their customers.”

The grand cut will reduce monthly repayments for borrowers who are linked to the Bank rate, through tracker deals, by around £134 on a typical £150,000 mortgage.  However, the cut has faced opposition and criticism.  The British Shops and Stores Association are counted among the critics, saying that banks are to blame for imposing “unreasonable” rises in loan and overcharge rates in recent months.  The Association’s chief executive, John Dean, said that these price hikes had placed unnecessary “severe strain” on independent retailers: “If the Government cannot persuade lenders to pass on this rate cut, then banks must be shamed into doing it.”

About 50 per cent of the current borrowing market will not see a change to their repayment rates as they are on fixed-rate deals and will be charged at the agreed fixed rate until the end of the current deal.  These fixed rate deals are being seen less and less throughout the country, however, as the banks wait to see how the market will react to the interest rate cut.

Nevertheless, there should be an air of caution around the whole debacle, says David Kern, an economic advisor at the British Chambers of Commerce.  “”We support the Monetary Policy Committee’s decision to cut rates by more than analysts expected. But we believe the MPC should move much more steadily and deliberately and avoid too many lurches towards emergency measures,” he said.

“Emergency measures have the undesirable affect of unsettling the markets and undermine confidence. Using up all their bullets prematurely will leave the MPC with little scope to inject confidence through continued rate cuts when the recession deepens.”

It would appear that shadow chancellor George Osborne put it best when he said, “This is a shot in the arm for the economy, but it shows how sick the patient is.”  The interest rate cut will be a great help to borrowers, but more must be done to fix our ever-wounded economy.

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