As if to highlight the limited affect that interest rate reductions are having on the economy, today’s quarter point up in UK base rates by the Bank of England has hardly registered in the financial services sector. While it seems likely that more will follow, possibly in July and September, the difficult situation in the UK financial sector is far from over.

The rate announcement was followed by a wall of silence from the main lenders in the UK with many insisting that they would only pass on rate cuts “where possible”, and some actually reacting by putting up their mortgage rates (and taking away many of their reduced rate offers). The reason for the lack of action can be explained by what is happening with the LIBOR rate (the London Inter Bank Offer Rate) which is the rate at which financial institutions will lend and borrow money between each other. Normally the LIBOR rate is about 0.25% higher than the UK base rate, but at the moment it is about 0.75% higher (reflecting the increased risk and lack of capital), although it did reach a high of 1.15% greater than base rates back in September when the credit crunch really began to register.

In the press we will no doubt see claims that the banks are making extra margin while the rest of us struggle but the fact is that lending and borrowing is a risk related action, and the greater the risk of default, the higher the rate will be compared to the base rate. As we have covered on this blog on a number of occasions, the credit crunch is far from over and slowly but surely it will need to work its way through the system. The main turning point will come when the affects start to diminish and the position of both the UK economy and base rates are at that time, as well as the worldwide picture, will be vital. So what happens in the meantime?

The situation for at least the next 12 months looks very bleak, and while we will see speculation of further rate cuts and assistance from the authorities, as today has shown, the affect of base rates on this current situation is limited. More people will go bankrupt, more people will lose their homes and while there are savings that many of us can make in our daily lives, these may not be enough to save many from hardship.

More and more people are comparing the current situation to the depression of the early 1900s when economies around the world fell for a sustained period of time and people struggled under mountains of debt. Whether the world economy will actually fall into a depression is very unlikely but if we were to receive any more bad news, e.g. another large hike in the oil price, then there is the potential for things to get much worse before they get better.

We all need to tighten our belts and ride out this difficult situation until we start to see the light at the end of the tunnel, although it may be a case of easier said than done for many of us.