| Bank of England grants City 0.25% cut |
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| Thursday, 10 April 2008 | |
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Page 2 of 2 "There are some who believe that rates could fall further still, but the likelihood is that today's cut will be the last we will see this year, unless the economic situation deteriorates further," he warned.Nici Audhlam Gardiner, Abbey director of mortgages, said that it was unclear whether the size of the rate cut provided the adrenaline shot needed to restore confidence amongst borrowers, and added that ultimately the only customers that were guaranteed to feel the cut are those already on existing tracker deals. "As banks' lending costs don't automatically fall when base rate falls, the cut may not immediately feed through to new business rates," Audhlam Gardiner concluded. Minimum expected Ray Boulger of John Charcol said that the bank rate cut of 0.25 per cent was the minimum expected, but warned that more of the same will be needed soon. "Although the Consumer Price Index (CPI) may exceed the 3 per cent ceiling target in the next few months, it is too late for interest rate changes to affect this and so the MPC is right to look beyond the expected short term inflation spike to the bleaker economic future," he added. Housing transactions are 35-40 per cent down on a year ago and housing market activity plays an important role in stimulating the UK economy. Boulger explained that the squeeze on mortgage availability and frequent criteria changes would be a contributing factor to chains breaking down. "It only needs one person in a chain to find that by the time an offer has been accepted the mortgage market has moved against them, for everyone in the chain to be left high and dry. Thus the shortage of mortgage finance is a very real threat to the level of economic activity as well as to house prices," he pointed out. Control of our own destiny Boulger stressed that there were significant differences between today's economy and that of the last housing downturn in 1988 - 1995, which is why he does not expect the scale or duration of current house price weakness to be on the same scale. He said that confidence was the most important factor influencing house prices and added that the two most important factors influencing confidence were interest rates and the level of unemployment. Capital Economics is now forecasting GDP growth next year will fall to only 1 per cent and although unemployment has so far remained low, Boulger predicted that it will increase in a slowing economy, but not on the same scale as the early 90s increase. "As far as interest rates are concerned today we, or at least the MPC, have control of our own destiny, whereas the last Government's highly dubious decision to join the Exchange Rate Mechanism left sterling such a hostage to fortune that Bank Rate remained far too high for much too long and crucified the economy as a result," Boulger said. Standard variable rate All borrowers with an existing bank rate tracker mortgage will see the full benefit of today's cut, but borrowers taking a new tracker mortgage today will still be paying more than the initial rate new borrowers on a tracker mortgage paid when Bank Rate was at its recent peak of 5.75 per cent last summer. This is because lenders' tracker margins have on average increased over this period by about 1.25 per cent. "Some lenders, including Nationwide and Standard Life, now have some of their tracker rates for new borrowers higher than their SVR. This is untenable and something has to give. Tracker margins aren't coming down any time soon and so the only conclusion is that the spread between Bank Rate and SVRs will widen. Only last month Kent Reliance increased its SVR by 0.25 per cent," he said. "Whilst a cut in Bank Rate mitigates the current problems, the bigger issue is the lack of liquidity in the market. After the last Bank Rate cut in February, 3-month Libor actually increased. The market needs today's rate cut to be linked to a programme of larger cash injections, for longer periods, from the Bank of England," Boulger concluded. Modest slowdown in the general economy The MPC's decision was widely expected. Richard Lambert, CBI director-general, said earlier this week that the MPC faced a particularly finely balanced decision this time. He pointed out that the slowdown in the general economy since Christmas had been modest and that inflation was likely to pick up in the next few months. Weaker economic growth over the year, however, should keep inflation under control over the slightly longer term. Lambert added that the credit crunch was pushing interbank and mortgage lending rates up, which is constraining economic activity and demand, despite the MPC’s attempts to loosen monetary policy through two recent interest rate cuts. "It seems clear that another reduction in rates is in the pipeline. The Bank should make a quarter point cut now, rather than later, to help hard-pressed businesses and consumers," he concluded. The minutes of the meeting will be published at 9.30am on Wednesday 23 April. Related articles
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