Why do lenders often link their loan-interest rates to the BankofEngland base rate?

Question

If morgage lenders all decided they were not going to link any of their mortgage offerings to the base rate, wouldn't this just mean the BoE would have no control & noone would care what their base-rate is?
Why aren't lending interest rates solely controlled by competitive forces between lenders, like many other prices in our consumer-driven society?

Answer 1

The BoE base rate is the rate at which the commercial banks can borrow in case of emergency. So it's like an emergency 'cost' of funds; therefore they shoudl at least cover that.

If banks decide to go below that rate, it would possibly mean that they have absolutely no liquidity issues. Basically the $ is rotting in their safes, and it's better to lend it out rather than keep it idle.

Not however, if that is the case, it would mean that investment opportunities are low at the given rates, the economy is likely not to be doing well, and chances are the BoE would be looking at a rate cut itself.

Chances are the BoE rate is lower than the pure market rate. Therefore, just like a price ceiling that's below the equilibrium price, it doesn't matter.

The reason is that you must rememebr that the BoE is a lender of last resort. If the interest it charges is too high, it wouldn't be playing that role very well...

So I guess my answer is that be definition the BoE base rate should be lower than the market clearing interest rate, so in fact doen't affect the loan-interest rates so much.

When they increase the base rate, it's more of a signal for something the banks would have done anyway.

Answer 2

the lenders borrow their money from the bank of England so any rise and fall of the base rate effects how much they are being charged, so that charge is then passed on to you "THE MORTGAGE LENDER" .
only way round this is to have very rich parents ,

the base rate is also based on inflation , if the economy is doing well then the base rate stays down but if not it goes up ,

the economy / inflation is effected by the balance of trade which is the balance between what we import against what we export

the base rate, economy , inflation , balance of trade can change day to day and it go's on and on ..

so its not just the B.O.E. its the whole country and how it is run which will effect the base rate. IE government (LABOUR )

YOU CAN ONLY HOPE YOUR GOVERNMENT DOES ITS JOB TO KEEP THIS WONDERFUL COUNTRY GREAT.

SO DO' NT WASTE YOUR VOTE :-).