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Why Low Base Rates are Bad for You

It seems that the economy is run by magicians. On one hand we are told that low base rates are important for the economy. On the other hand I have yet to find somebody who is really benefitting from low base rates. Wherever you go the actual lending rates are much much higher. Look at mortgages for example. Historically mortgages were always approximately base rate plus 1%. You cannot find any mortgage for say 1.5% in the UK. The same applies for business loans. Historically business loans were always between 2 and 4% over base. Again, you will find it very hard to obtain a business loan at 2.5%. So where is the magic trick? It seems that low base rates have only one benefit: helping banks to borrow cheap money from the Bank of England (I think that is called Quantitative Easing) and then buying government bonds. If this is your financial model then clearly you are not motivated to lend to small businesses. And I wonder what will happen to the high ‘lending margins’ when Base Rates are starting to rise?

What is your opinion?

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