Rate cut will aid property market

Wednesday, 6 February 2008 12:00 AM

The Bank of England is expected to cut interest rates tomorrow, in what could be a welcome boost to the UK property market.

Following a 0.25 per cent cut in rates in December, the Bank is now expected to make a similar cut when its monetary policy committee (MPC) reaches a decision tomorrow.

Last week the American Federal Reserve cut interest rates from 3.5 to three per cent, following a cut of 0.75 per cent earlier in the month, as fears of recession deepened.

And a change in the UK rate would be refreshing for a property market under a cloud of slowing prices and falling demand, according to homebuilder Galliford Try Homes (GTH).

"While the housing market is set for a recovery, an imminent rate cut is needed to increase consumer confidence and property sales," said Chris Coates, managing director of GTH.

"The economy is on track and all the indicators are showing the financial squeeze on consumers is short term and overall demand for housing will continue to outstrip supply, especially in the south-east.

"The general feeling is that interest rates are on their way down this year and by initiating a cut now, homebuyers and industry will move forward in 2008 with renewed confidence."

Expectation of a 0.25 per cent cut is now almost universal.

Howard Archer, of analysts Global Insight, said "Despite calls for a 50 basis point reduction, we expect the Bank of England to trim interest rates by 25 basis points to 5.25 per cent next Thursday."

He was supported by representatives of RBS, Lloyds TSB, Barclays and Capital Economics - all of whom expected a quarter per cent cut.

However, consumers are not convinced and expect any reductions will be short lived.

"Our survey suggests an interest rate cut may do little to boost confidence in the short run because of the view that it will be reversed within a year.

"Consumers are clearly increasingly feeling the strain of higher prices - energy and food in particular - and this is starting to convince them that the Bank of England will be forced to keep interest rates high in order to keep inflation under control," concluded Trevor Williams, chief economist, Lloyds TSB Corporate Markets.

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