Base Rate relationship to lending rates?

[mauzj]

So the Bank of England dropped the base rate to 3% yesterday. Interbank rates are still a lot higher.

In what way does a base rate drop mean that banks should lower their lending/borrowing rates. Can they now lend/borrow from the BOE at 3%? I'd like to understand how the rate reduction is more than a few words.

Apologies for the simple question, but I'm a technical trader with little knowledge of economics.

 

[BSD]

Thats the basic idea but the problem is that banks do not have to pass on those advantages to their customers, it's only competition that eventually brings retail rates up or down in accordance with CentralBank rates.

EG I read yesterday somewhere that one UK house lender moved immediately, cutting rates for mortgages, while most others are going to hold out as long as they can, increasing their profits that way.

It's a question of how do you do it, lower your rates and attract lots of new business that way...

OR keep rates higher as long as you can fleecing your existing customer base...

Imo only the first alternative is long term viable, but as we have seen in the recent financial mess, common sense and long term thinking are not even remotely what drives banks business models.

 

[A Dashing Blade]

Peston explains it reasonably well here.