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Building societies urge restraint on interest rate reductions

The Building Societies Association (BSA) has today suggested that the Bank of England should leave UK base rates unchanged as we approached the MPC meeting this week. This is very much against the general trend in UK where businesses and UK banks are demanding a further reduction in UK rates to try and stimulate activity in the UK economy. However, the building society sector is very much based on a mutual interest between members and building societies themselves.

UK building societies account for up to 20% of all mortgages in the UK and more crucially they also account for more than 20% of all UK savers. They also depend more directly on savings accounts which are used to fund the vast majority of financial business for the sector. If UK base rates fall to 1%, as widely expected, the BSA expects a net outflow of funds as investors look for more generous investment returns than those afforded to today's savings accounts. As a consequence, this will severely impact on the financial strength of building societies throughout the UK and weaken what has been a vital part of the UK financial sector for some time.

Whether a reduction in UK base rates would prompt any form of bailout from the UK government remains to be seen but the BSA believes the situation could turn critical, the lower UK base rates fall.

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