How does the Bank of England base rate affect the retail banks rates?
James Edwards, Sutton Coldfield. The sad reality, is that the Bank of England base rate only has an indirect effect on banks’ rates. Banks do not borrow from the Bank of England and lend on to consumers. Banks principal source of funding is deposits and they must mark up the cost of these funds to consumers. Lowering the Bank of England base rate creates a type of cascade through the system which will result in lower deposit rates but it takes some time – usually months. Beware though, banks haven’t made a lot of money in past years lending on money and now with higher expected losses they will be charging a higher margin above what they pay depositors. In many ways, this will negate the effect of base rate cuts. I understand it is a problem, but exactly why can’t a government just print more money in order to increase liquidity in the banking sector? Paul Pearson, Bristol. The UK government can print more money either through the printing press at the Mint or through issuing governmen
