Bank of England cuts rates to 5%

Thursday, 10 April 2008 12:00 AM

The Bank of England has today announced a 0.25 per cent cut in UK interest rates, bringing the base rate down to five per cent.

The cut comes as the UK economy faces slow growth and as house prices fall, with Halifax this week announcing a 2.5 per cent fall in prices during March.

The 25 basis point reduction in the Bank base rate was widely expected, but pressure now mounts on lenders to pass on the cut to borrowers.

The high London Interbank Offered Rate (Libor) has meant Bank of England interest rate cuts in December and February have not been passed on to new borrowers and mortgage rates have in fact increased.

The Bank has cut rates from 5.75 per cent to 5.25 per cent in recent months.

Data from the Council of Mortgage Lenders (CML) show repayments on a variable rate repayment mortgage of £150,000 should fall £22.98 after a 0.25 per cent rate cut, while on an interest only mortgage repayments will fall £31.25.

Further interest rate cuts are now expected later in the year, but the monetary policy committee (MPC) still needs to balance inflationary pressures and the needs of the economy amid the credit crisis.

It is hoped the slowing economy will eventually help to bring down inflation - which is currently half a percentage point over the target of two per cent.

Julian Jessop, at Capital Economics, now predicts UK interest rates could fall to as low as 3.5 per cent.

He said: "Since last month's decision, the dilemma facing the MPC has not got any easier to resolve. But on the whole, we think that the renewed problems in the money markets and the recent dire news on house prices will carry greater weight than inflation concerns at today's meeting.

"The UK economy facing similar economic imbalances to those unwinding with devastating effect in the US.

"The upshot is that interest rates will need to come down considerably further. We expect additional cuts to four per cent by the end of this year and then to 3.5 per cent in 2009."

The Council of Mortgage Lenders (CML) has criticised the Bank for its lack of coordination in its attempts to control the credit crunch.

"This is good news for those borrowers with mortgages tracking the Bank base rate. But in these dysfunctional market conditions, the base rate is not in itself a good guide to the cost or availability of funds to lenders," said CML director general, Michael Coogan.

"To improve the market in which lenders are operating and restore consumer confidence, the Bank needs to coordinate successive base rate cuts with further injections of more widely available liquidity."

These sentiments were echoed by the Royal Institution of Chartered Surveyors (Rics), which argues the bank must do more.

"The easing of rates to date has not been feeding into the high street and has offered little assistance in combating the credit crunch, hence the need for the Bank of England to take action despite some data suggesting a degree of resistance in the economy," said Rics chief economist, Simon Rubinsohn.

Further cuts are, however, expected.

"We expect the Bank of England to continue to enact gradual, but steady interest rates cuts," said Howard Archer, economist with Global Insight.

"We forecast the next 25 basis point cut to 4.75 per cent to occur in June or July, and anticipate that interest rates will fall to 4.25 per cent by the end of 2008 and to four per cent in the first quarter of 2009 as extended below-trend growth increasingly undermines companies' pricing power and limits wage growth."

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