Before you get the pitchforks and torches ...
Don't be too hard on the bankers over interest rate cuts; it's the money market rate that counts
Julian Knight is the Money and Property editor for the Independent on Sunday and interim Economics Correspondent, previously he was the personal finance reporter for BBC News and has published seven books.
Sunday 09 November 2008
The world and his wife are all in agreement that banks are pure evil. They have had our money, but they dither when it comes to rate cuts. And boy are we desperate for it. Repossessions are soaring and unemployment is rising; just think what a fillip a 1.5 per cent cut could provide. But before sharpening those pitch forks, lighting the torches and chasing the local banker off the nearest cliff, we must recognise that in the new post-credit crunch world the Bank of England base rate is nowhere near as important as it used to be. Put simply, it's the money market rate that counts and it is moving lower but not as far or quite so fast.
No lender is going to slash all its new mortgage rates willy-nilly and identify itself as a best buy because it would be hit with a demand for remortgage business that it couldn't possibly meet by raising cash on the money markets.
Some will cut their standard variable rates by a big amount – between 1 and 1.5 per cent. But so few customers these days are on SVR that cuts won't make all that much of a difference. The real winners will be existing tracker rate mortgage holders – roughly 30 per cent of the market – who will see their repayments slashed. But fixed rate customers – around 58 per cent of the market – will see little or no benefit, but that's what they signed up for.
The upshot is that, regardless of the furious headlines and the bandwagon jumping politicians, most of us will have to wait for our rate cut jam and although banks – through their lax lending – are in large part responsible for this grim new world we live in, this isn't a case of collective maliciousness on their part.
The introduction of personal accounts from 2012 looks increasingly as if it may be botched. At present, the Government is reviewing how personal accounts – which will see millions of workers auto-enrolled into a pension scheme – should work and crucially, we hope, how it interacts with the state benefits currently available.
I have always been in favour of personal accounts. Put simply, we must get people saving more and paying for their own retirement. But I have put a big caveat on my support for these accounts, and that: means-tested state benefits need to be reformed at the same time. The danger we face is that millions will save in the accounts only to get to retirement and find that their savings bar them from state benefits, especially pension credit. It's simply not fair that workers make sacrifices and do the right thing and end up with the same amount of money as someone who has saved nothing. It has the potential to be the mis-selling scandal to end all mis-selling scandals. The only way to avoid this is to reduce the benefits paid by the state – which at present are designed to grow markedly over the next few decades.
Following the Pensions Commission report compiled by Lord Turner and the subsequent Pensions Act there were some fine words spoken by politicians of every hue that they recognised that the long-term health of the retirement savings system was crucial to the country and that short-term political considerations would not distract them from doing what was right.
Now politicians think they have bigger fish to fry, and their pledge to do what is right come what may is being forgotten. Sad to say, from the soundings I am getting, we could be returning to the same old short-term approach to pensions, a subject on which we need to take a generational view. It looks as if ministers may back away from reform of the means-tested benefits needed to make personal accounts credible. The emerging attitude is: let's get the accounts up and running and look after the means-tested benefits mess later. However, if they do that, they will find that a lot of the support for personal accounts will disappear overnight.
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