Monday, 20 September 2010

Bank of England Base Rate Fun

Steven_L highlights something which everybody knows - apart from the BBC, of course.

My latest blogpost: Bank of England Base Rate FunTweet this! Posted by Mark Wadsworth at 20:54

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4 comments:

Steven_L said...

Well that boosted the hits MW, cheers!

It's not something 'everybody knows' it's actually the most common HOist misconception I come across.

Despite putting sterling and the UK AAA rating at serious risk to pin their mortgage rates to the floor, half of them still think they are being ripped off!

20 September 2010 at 22:52
John B said...

Everyone apart from the BBC and, erm, the Treasury. And, erm, the truth.

"Bank rate: The main interest rate at which the Bank of England lends money to financial institutions. This interest rate in turn affects the rates that commercial financial institutions offer their customers for loans and deposits. It is set each month by the Bank of England’s Monetary Policy Committee (MPC). (N.B. Also referred to as the ‘base rate’.)"

21 September 2010 at 03:55
Mark Wadsworth said...

John B, in which case HM Treasury haven't updated that bit of their website. I quote from the the Bank of England website:

"On 18 May 2006 the Bank introduced some wide ranging reforms to the framework for its operations in the sterling money markets (details can be found here and here .

Theses reforms included:

i. The introduction of reserve accounts, held by commercial banks at the Bank, on which the official Bank rate is paid. The reserves scheme is voluntary and members undertake to hold a particular target balance not every day but on average over a monthly “maintenance period”.

ii. Standing facilities which allow a wide range of banks to borrow (against collateral) or deposit money with the Bank at rates which on most days are 1% above and 1% below the official Bank rate, but 25 basis points (¼%) above or below on the last day of each maintenance period.

21 September 2010 at 08:41
Steven_L said...

Also if you look at the BofE balance sheet and say Lloyds balance sheet you can see that while the banks have over £140b stashed away earning 0.5% in their reserve accounts (presumably keeping their bonuses safe?) there are no short term repos outstanding.

Yes, the BofE has the power to lend at 0.5% to banks, but for all intents and purposes this rate is the rate they are earning on their deposits.

The fact that HMT is publishing misleading information like this is very worrying, no wonder so many Home-ownerists believe that banking works by the BofE lending 'taxpayers' money to the banks at 0.5% then the greedy banksters lending 'their own' money back to them at 5%.

Then again, this is probably what HMT want the HOists to think, and it's working.

21 September 2010 at 14:58

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