Q&A: What the base rate cut means for you

What does this mean for savers?
The full picture of how today's decision will impact on individual savers will only become clear in the next few days as savings providers announce what they will do to their rates. Many have already cut savings rates in recent weeks, but this does not mean there won't be further cuts in the light of today's announcement. Last time the base rate was reduced, many providers repriced their accounts to reflect the change.

Halifax, for example, cut rates on its range of accounts, although not all by the full 0.25%. At that point the base rate was set at 3.50%, so savers were hit particularly hard by the cuts. Saving rates are still at a historically low level, but it seems likely savers will still be able to achieve rates above 4.5% if they shop around.

Savers who have tracker accounts - accounts offering a rate tied to the base rate - will be affected by the cut. With these types of accounts, the full 0.25% reduction will usually be passed on.

Will rates fall straight away?
Customers with Skipton building society's Base Rate Tracker account will have the cut passed onto them within 14 days, but most other providers will take time to pass on the cut.

We may see the first announcement of cuts as early as this afternoon, but although under the Banking Code they are allowed to, banks and building societies are unlikely to reduce rates with immediate effect. Many won't even announce what they plan to do until they have a chance to look at the commercial impact of a reduction and have seen what some of their competitors have chosen to do.

Most account providers will announce that they are cutting rates with effect from September 1, giving savers some time to shop around for a new deal. If you are among those who think you can get a better rate elsewhere, make sure you are aware of what the rate on any new account will be after the start of next month. There's little point switching if your new account is set to be less competitive in a few weeks' time.

Will all accounts be affected?
Fixed-rate accounts, by their nature, offer protection against rate cuts so savers with these accounts will be unaffected for now. The interest rates offered on fixed-rate deals are not immediately affected by the base rate, and in recent weeks they have actually been going up. Today's decision is unlikely to lead to any of these accounts being pulled from the market, or the rates on offer being reduced. Leeds & Holbeck building society, for example, has already confirmed it will maintain the rate on its one-year fixed-rate bond at 4.80%.

And how will borrowers be affected?
Mortgage lenders are likely to come under pressure to cut their standard variable rates, which form the basis of their discount and variable rate deals. Most will introduce cut rates for new customers with immediate effect, but delay changes on existing mortgages until the first of next month, or perhaps even later. First Direct however, has already announced it is passing on the full 0.25% cut to all borrowers with immediate effect.

Lenders are not obliged to pass on a cut though, and may opt not to, or to pass on only part of the 0.25% base rate reduction. However, given the competitive nature of the UK market, many are expected to pass on today's reduction in full. They should announce their decisions in the next week.

Again, customers who have opted for deals which track the base rate will see their borrowing costs fall by the full 0.25%, unless their deal includes small print which precludes a full reduction. At Skipton, as with the tracker savings account, there is a commitment to pass on any rate change in full. This time the timeframe is within 15 days, although a spokeswoman for the society said the repricing of savings accounts and mortgages could happen on the same day.

If the society did opt to cut savings rates before it cut the cost of borrowing it would hardly be setting a precedent. Last time the base rate was reduced Lloyds TSB reduced rates on its savings accounts two weeks before mortgage customers of its lending arm (Cheltenham & Gloucester) felt the benefit of a reduction.

Borrowers on fixed-rate mortgages will not, of course, be affected by today's decision. The rates on these deals have been falling in recent weeks in anticipation of further base rate cuts, so borrowers have already in effect benefited from the reduction. How these deals are priced in the coming weeks will depend on what the City thinks will happen to rates next.

Chris Parrish, group treasurer at Yorkshire Building Society's, explains: "We have seen funding rates reducing over the last month in anticipation of this reduction, leading to a buoyant market of reducing fixed rate mortgage deals and lower savings rates.

"However recent global economy reports show performance better than previously anticipated, so further base rate cuts may not follow. The inflation report due out next week will give a clearer indication for the UK going forward, and until then funding is unlikely to reduce further, meaning even cheaper mortgage deals are also unlikely to be arriving on the market."

What about credit cards and loans?
The rates on these types of borrowing are unlikely to be affected by today's announcement, although the cut will be noted by the lenders. Andrew Hagger, spokesman for financial information company Moneyfacts, says: "You normally find that there will be a couple of movements in base rate before these rates are changed."

New savings and mortgage rates