Credit crunch: Bank of England cuts interest rates

BANK of England policymakers cut interest rates to 5% today in the latest attempt to shore up the economy in the face of a deepening credit crisis.

The quarter-point cut is the third since December and comes amid signs of gathering economic gloom, with figures earlier this week showing that house prices fell 2.5% last month – the biggest monthly drop since the property crash of the early 1990s.

Today's decision will be a welcome boost to cash-strapped borrowers, already under pressure from soaring inflation.

Monthly repayments on a £100,000 mortgage will fall by £16 if lenders pass on the cut in full, reducing them from £722.80 to £706.77 a month, based on a new rate of 7%.

But there are fears that many lenders will not pass on the quarter-point reduction to borrowers, with the crisis in wholesale money markets already seeing a raft of mortgage providers increase rates and pull deals.

The past two rate cuts saw little reaction from lenders, with nearly one in five failing to pass on December's interest rate cut a month later, while others reduced their rates by just 0.15%.

A similar pattern was seen after February's interest rate cut and around a fifth of mortgage lenders are expected to opt against following the Bank of England's lead with today's full quarter-point cut, which could spell more mortgage misery for some borrowers.

Inflation rose to 2.5% in February, but even if commodity prices remain at their current high levels, the Bank of England said inflation should fall back later this year.

In a statement following the rate cut, the Bank explained the balancing act it faced to keep inflation on track for 2% over the medium term.

It said: "On the upside, above-target inflation this year could raise inflation expectations so that, in the absence of some margin of spare capacity, inflation would remain above the target.

"On the downside, the disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below the target."

It said the balance of these risks to the inflation outlook in the medium term justified a cut in interest rates this month.
The Bank added: "Credit conditions have tightened and the availability of credit appears to be worsening.

"While the recent depreciation in sterling will support net exports, the prospects for output growth abroad have deteriorated.

"In the UK, business surveys suggest that growth has begun to moderate and that a margin of spare capacity will emerge during this year. This should help to keep domestic inflationary pressures in check in the medium term."

GOOD NEWS FOR HOMEOWNERS AS LENDERS PASS ON RATE CUT

THE UK's biggest mortgage lenders were quick to announce they would be passing on today's interest rate cut in full.

Halifax, Nationwide and Barclays' mortgage arm the Woolwich all said they would be reducing their standard variable mortgage rates by the full 0.25% within minutes of the Bank of England's Monetary Policy Committee making its announcement.

Lloyds TSB, which also offers mortgages under the Cheltenham & Gloucester brand, and First Direct are also cutting their standard variable rate by 0.25%, having said in advance that they would mirror the MPC's decision.

The move will reduce monthly mortgage repayments by £16 a month for a homeowner with a £100,000 mortgage, reducing them from £722.80 to £706.77 a month, based on a new rate of 7%.

People who are more heavily mortgaged with a £250,000 home loan will be around £40 a month better off, with repayments falling from £1,807 to £1,767.