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Interest rates cut to 4.5%
The Bank of England today cut interest rates to 4.5 per cent.
This is the first time the Bank's Monetary Policy Committee (MPC) has lowered the UK's underlying rate of borrowing since July 2003.
Ahead of today's announcement there had been widespread speculation that interest rates would fall from their three-and-a-half year high of 4.75 per cent.
The Bank raises and lowers the cost of borrowing in the UK in an attempt to keep inflation as close as possible to the government's target rate (currently two per cent).
Since last month's decision to hold interest rates, a suite of economic data has shown the UK stuttering - and the vast majority of economists predicted that the Bank would respond by cutting rates.
Surveys by Reuters and Bloomberg revealed that 78 out of the 87 economists polled expected a rate cut, with the rest expecting a freeze.
"A 0.25 per cent interest rate cut to 4.5 per cent now seems a nailed-on certainty on Thursday," said Howard Archer, chief UK economist at consultancy firm Global Insight, ahead of the decision.
In the run-up to the meeting influential groups including the Confederation of British Industry and the Institute of Directors also called for rates to fall.
And in its 100th meeting the MPC did not disappoint - reducing the cost of borrowing for the first time in 25 months.
The 0.25 per cent fall in interest rates will reduce mortgage repayments for the millions of homeowners on variable rate, discounted rate, capped, and tracker mortgages.
However, it will also see a fall in the rate of interest paid on many savings accounts.
By making debt cheaper and savings less lucrative, a cut in interest rates should have the effect of boosting spending, as well as offering support for the ailing property market.
Over its 100 meetings to date, the MPC has held interest rates 69 times, increased them 14 times and cut them 17 times. Mervyn King, current governor of the bank, is the only person to have attended all 100 meetings.
This is the first time the Bank's Monetary Policy Committee (MPC) has lowered the UK's underlying rate of borrowing since July 2003.
Ahead of today's announcement there had been widespread speculation that interest rates would fall from their three-and-a-half year high of 4.75 per cent.
The Bank raises and lowers the cost of borrowing in the UK in an attempt to keep inflation as close as possible to the government's target rate (currently two per cent).
Since last month's decision to hold interest rates, a suite of economic data has shown the UK stuttering - and the vast majority of economists predicted that the Bank would respond by cutting rates.
Surveys by Reuters and Bloomberg revealed that 78 out of the 87 economists polled expected a rate cut, with the rest expecting a freeze.
"A 0.25 per cent interest rate cut to 4.5 per cent now seems a nailed-on certainty on Thursday," said Howard Archer, chief UK economist at consultancy firm Global Insight, ahead of the decision.
In the run-up to the meeting influential groups including the Confederation of British Industry and the Institute of Directors also called for rates to fall.
And in its 100th meeting the MPC did not disappoint - reducing the cost of borrowing for the first time in 25 months.
The 0.25 per cent fall in interest rates will reduce mortgage repayments for the millions of homeowners on variable rate, discounted rate, capped, and tracker mortgages.
However, it will also see a fall in the rate of interest paid on many savings accounts.
By making debt cheaper and savings less lucrative, a cut in interest rates should have the effect of boosting spending, as well as offering support for the ailing property market.
Over its 100 meetings to date, the MPC has held interest rates 69 times, increased them 14 times and cut them 17 times. Mervyn King, current governor of the bank, is the only person to have attended all 100 meetings.
posted by Bruce Wayne at 4:29 PM
Interest rates cut to 4.5%
10 Comments:
A single 1/4 point movement in rates will not make hardly any difference. People's spending patterns are not that sensitive to such small movements.
What it does do though is signal that the trend is downwards, and if followed up 2 or 3 more cuts in the next six months then it will be internalised by the consumers and their behaviour will change in 9-12 months.
Does it single a downwards trend, the BoE's mandate is to manage inflation not demand
Much of what I've read lately implies that while there may be a small cut it doesn't signify the start of a downward trend as there are still plenty of inflationary pressures e.g. oil price, earnings growth etc.
£12 saved on my mortgage each month ... yipee!
Why is the Bank of England trying to encourage spending and prop up the housing market when every time I turn on the TV I see more about how many people are already over borrowing on their credit cards and first time buyers cannot get onto the property ladder? Whilst I fully believe the BoE knows more than me, I wish someone could explain what was going on!
Great! NOT! We need the pressure to be kept up on mortgages. House prices remain way too high. Drops in interest rates may well re-ignite the boom, and at the least prevent further falls. Thousands of young people remain priced out of home ownership, resulting in a stagnant market for all!
Lower interest rates do not benefit, or encourage savers. Lower interest rates will lead to a more buoyant housing market and push that first rung of the housing ladder even further from the grasp of the first time buyer. Perhaps we should be grateful that we still control our own interest rates and are not forced to accept the 2% figure that the ECB has fixed today. Consumer spending is too high, personal debt is too high, Interest rates need to be raised to foster an ethos of saving and not borrowing.
This isn't good for first time buyers. As a graduate with 4 years experience, and a generous contribution towards a house from my parents, even the most basic of ex-council houses around here are £20,000 over what I can raise, and that assumes I didn't need the little things in life like furniture. All an interest rate cut does for me is reduce the interest on my savings, which are my only hope of ever buying a house. We don't need cheaper mortgages, we need lower house prices!
I am retired and it affects me as my savings are earning less. We have been encouraged to save and now the system seems to be working against my savings. House prices are still too high and this cut in interest rate is giving the wrong signal to sellers and estate agents, the prices of houses should come down by at least another 10%. British industry has never been competitive; sustaining the 7.75% interest rate would have help lower pay to make us more competitive in the world; we are now really living on borrowed time. Even if interest rates came down to 3% I cannot see how that could help British industry to be competitive except that the pound would fall through the skies and we would be paying more for imports which always seem to be better made.
This is the first time the Bank's Monetary Policy Committee (MPC) has lowered the UK's underlying rate of borrowing since July 2003, and the decision is set to impact everything from house prices to savings account.
Mortgages
Variable rates
If passed on to the 46 per cent of mortgage holders on their lender's standard variable rate, today's fall in interest rates could save borrowers over £25 a month on interest payments on a £120,000 mortgage.
So far Halifax, first direct, Intelligent Finance, and Sainsbury's Bank have all said they will pass on the full rate cut to borrowers on variable rate mortgages, with others set to follow suit.
However, there are concerns that not all lenders will pass on the discount.
"In this competitive market both fixed and variable rates will undoubtedly reduce, but the interesting factor for borrowers will be the movement of the standard variable rate. Lenders could use this opportunity to increase their profits by not passing the full rate cut onto their customer. Timing will also be ?telling? as lenders often practice ?sneaky? delays before dropping rates on mortgages for existing customers," said Louise Cuming, head of mortgages at price comparison website moneysupermarket.com.
However, Skipton Building Society defended its decision to delay a cut in rates.
John Goodfellow, chief executive of Skipton Building Society, said: "We are currently reviewing our options to ensure a fair balance of rates across our product range. We hope to make a decision regarding Skipton Building Society?s rates next week.
"It is worth pointing out that any delay in making possible decreases to savings rates is in the interest of our investors, although those with both mortgages and investments tracking the base rate will see their rates reflect the full decrease, with effect from 19 August."
Fixed rates
Today's move by the Bank of England's interest-rate setting Monetary Policy Committee (MPC) had been anticipated for some time by the mortgage market - and this means that it is set to have very little impact on the interest rates available for fixed-rate mortgages.
Additionally, with interest rates finally declining from their three-and-a-half year high, some lenders are warning customers off fixed-rate products.
Matthew Wyles, group development director at Portman Building Society, commented: "This does not look like a particularly smart time to be locking into fixed rates and we believe there is limited risk in now opting for variable rate products which will pass on the benefit of future rate reductions."
Savings
Obviously, lower interest rates mean worse returns for savers. However, many organisations have been predicting this cut for some time and already reduced their rates.
And there are now concerns that a recent increase in the amount being saved could be hit as banks and building societies reduce rates.
Alex Tarver, senior analyst at Fidelity International, noted: "Many of the news wires point out that there has been a mini-boom in cash savings.
"This may slow down and be beneficial for attracting new money into equity funds. ING reduced its instant access savings rate ahead of the MPC's announcement by 0.25 per cent to 4.75 per cent from 5.0 per cent."
However, some savings providers are taking a stand, and publicising that their rates will not be falling.
Leeds & Holbeck Building Society, for example, has committed to keeping open its one-year fixed-rate bond, paying up to 4.80 per cent, open for investment.
Karen Wint, head of marketing at the building society, said: "We have secured additional funding for this product and with base rate now only 4.50 per cent, the bond offers an outstanding guaranteed return combined with access to half the funds invested, without notice or penalty."
Additionally, while borrowers will miss out on any delay in passing on reduced interest rates, savers benefit.
House prices
Opinion is heavily split on the impact that today's reduction of base rate will have on UK house prices.
While cutting interest rates undoubtedly increases affordability, the scale of the cut is modest. It was only after five quick-fire increases to interest rates that house prices stopped growing last year, and since then they have largely held onto their earlier gains.
However, things were beginning to look bleaker, with the Council of Mortgage Lenders yesterday predicting house prices were now on their way down, and this cut could soften the fall in prices.
But whether a 0.25 per cent cut be enough to stabilise the property market is open for debate.
David Bexon, managing director of SmartNewHomes, believed the move was more than enough to push prices higher.
"Whilst the push up to a 4.75 per cent base rate in 2004 acted to stabilise escalating house price inflation, it has since began to stifle the market and has recently been threatening to dry the last drops of life out of it. Today?s announcement should act to boost activity and facilitate a return to positive price growth," he commented.
"In real terms, we would now expect to see more buyers committing to property purchases which will help to neutralise the balance between buyers and sellers in the market place. It is now realistic to predict annual house price growth of around five per cent by the end of this year as the market returns to healthier times."
But Halifax is unconvinced, predicting a two per cent fall in UK house prices over the year, even with another fall in interest rates before January.
But the impact of the cut - while modest in financial terms - could be far larger psychologically.
Ray Boulger of John Charcol, explained: "Today's cut has been fully discounted by market professionals but about half the population were expecting the next base rate change to be upwards. Therefore, the effect this will have on consumer confidence should be magnified as many, psychologically speaking, have just received a half point cut.
"Two interesting surveys were published recently, one by the Bank of England and the other by Yorkshire Bank, revealing the public's jitters on interest rates, finding around 50 per cent of respondents thought that the next rate move would be upwards.
"The small cut today should therefore have a disproportionate effect on confidence and we are likely to see the more astute buyers, especially first-time buyers, who have been holding off until now reassessing that strategy. As a result, today's cut is likely to stimulate the first shoots of recovery in the housing market and I expect to see a significant change of mood over the next few months.
"The pendulum will swing from a buyers' market to equilibrium and then, by next spring, a sellers' market."
However, moneysupermarket's Louise Cuming had a warning for prospective homeowners.
"Lower rates will definitely boost affordability of borrowing, increase the attractiveness of house ownership and have the desired affect of increasing house purchases.
"However ? one word of caution in this time of good news for borrowers: as rates decrease, so too do lenders? profits and they may look elsewhere to make money. This is likely to be by increasing fees across the board, therefore it will be increasingly essential to use true cost analysis when sourcing a mortgage product to determine the real affect on your pocket," she warned.
This post has been added to the Carnival of Personal Finance #8!
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