Bank of England Leads Interest Rate Cuts

After an intense two day meeting, the Bank of England’s Monetary Policy Committee (MPC) announced on Thursday 7th February, that borrowing costs are to be trimmed by a quarter-point to 5.25%. This is the second cut in the last nine weeks and, although concerns about inflation prohibit the large cuts seen in the US, experts such as chief UK economist, Howard Archer believe “The Bank of England is likely to cut interest rates gradually but steadily”. Much will now depend on how the UK economy performs, according to analysts. Mr. Archer goes on to explain how “Latest data and survey evidence indicate overall that while UK growth is currently clearly showing it is not collapsing.”

UK businesses are, however, looking for a more aggressive attitude to interest rates: companies, particularly retailers, have been calling for a 0.5% reduction and were slightly disappointed when they heard the MPC’s news. David Kern, economic adviser to the British Chamber of Commerce, explained how “We would welcome a cut to 5% but we understand the MPC may be reluctant to give a misleading impression of panic.”

Large English mortgage lenders such as Nationwide and Woolwich cut their standard variable mortgage rates immediately after the MPC decision by the full quarter point. Halifax has confirmed they will pass on the full reduction from March 1, lowering its standard variable rate (SVR) from 7.5% to 7.25%. Homeowners with a £100,000 mortgage will see reductions of £20 per month, from £458 to £438. However, not all lenders will follow the same pattern, as explained by the Royal Institute of Chartered Surveyors in their 2008 UK Economic Brief: “At present, declines in the funding costs for mortgage providers have not been passed on to the high street, as lenders have chosen to widen their profit margins.”

Eurozone countries hold expectations of gradual easing of interest rates. The Financial Times explains in its online edition that in Frankfurt, the European Central Bank decided to soften its stance on future rate cuts on Thursday.

Andy Welland, International Sales Manager for the International Property Investment Network (IPIN) believes this is “A step in the right direction to stabilise the UK situation; however, it is a fine balancing act. The next 6 to 9 months will be crucial to improving consumer confidence, particularly if rates are reduced to 4.5% or lower, as analysts have predicted.”