Interest Rates

[MaxAndRuby]

Sorry for asking what's probably a simple question....

How does The Bank of England 'set' interest rates?

Presumably if a financial institution wants to borrow money they go to the markets and mark-up based upon LIBOR.

Where does the BOE get involved, and who cares if they set rates, and why?

[Simpo Two]

MaxAndRuby said:

How does The Bank of England 'set' interest rates?

I think Gordon Brown bullies them, then goes away quickly so it looks like it wasn't him.

[MaxAndRuby]

Simpo Two said:

MaxAndRuby said:

How does The Bank of England 'set' interest rates?

I think Gordon Brown bullies them, then goes away quickly so it looks like it wasn't him.

I'm sure that's the case, but does the BOE then lend to banks at that rate, and if it does where does LIBOR come in?

[emicen]

Part of the BofE's remit as the central bank is to be the lender of last resort, who will lend to the bank if the money markets are dry. This is quite pertinent of late.

By setting the base rate, they also set the rate at which banks will lend in non-mortgage transactions. Generally mortgage monies are funded off the interbank market, whilst personal loans are funded off the deposits made by customers iirc. (this may have changed, more and more funding has been sought through the money markets).

Building societies (the few that remain) are limited to only being able to raise I think 50% of their lending funds through the interbank market, the rest having to come from deposits.

So the BofE rate does have some effect on lending as all the funds dont come at Libor.

It also changes the return paid on gilts.

[jesusbuiltmycar]

emicen said:

Part of the BofE's remit as the central bank is to be the lender of last resort, who will lend to the bank if the money markets are dry. This is quite pertinent of late.

By setting the base rate, they also set the rate at which banks will lend in non-mortgage transactions. Generally mortgage monies are funded off the interbank market, whilst personal loans are funded off the deposits made by customers iirc. (this may have changed, more and more funding has been sought through the money markets).

[b]
Building societies (the few that remain) are limited to only being able to raise I think 50% of their lending funds through the interbank market, the rest having to come from deposits.[/b]

So the BofE rate does have some effect on lending as all the funds dont come at Libor.

It also changes the return paid on gilts.

Which is why, as a bank Northern Rock were allowed to raise the mojority of their lending funds through the interbank market....

[emicen]

jesusbuiltmycar said:

emicen said:

Part of the BofE's remit as the central bank is to be the lender of last resort, who will lend to the bank if the money markets are dry. This is quite pertinent of late.

By setting the base rate, they also set the rate at which banks will lend in non-mortgage transactions. Generally mortgage monies are funded off the interbank market, whilst personal loans are funded off the deposits made by customers iirc. (this may have changed, more and more funding has been sought through the money markets).

Building societies (the few that remain) are limited to only being able to raise I think 50% of their lending funds through the interbank market, the rest having to come from deposits.

So the BofE rate does have some effect on lending as all the funds dont come at Libor.

It also changes the return paid on gilts.

Which is why, as a bank Northern Rock were allowed to raise the mojority of their lending funds through the interbank market....

In fairness, nearly all banks raise the majority of their funds through the interbank market. I think the majority of thier problems were due to borrowing cheap and short yet lending long and risky with said money and when the funding slowed, they couldnt refinance at anywhere near the rate they had been paying and due to their very small depositor base, they couldnt top up the funds from there so ended up screwed.