Interest rates cut to 5%
UK interest rates have been cut to 5% from 5.25% by the Bank of England, balancing the risks of rising inflation and slowing growth amid the credit crisis.
It is the central bank’s third cut in interest rates since early December.
The Bank of England said in a statement: “The disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below the target.
“In the committee’s judgement, the balance of these risks to the inflation outlook in the medium term justifies a cut in bank rate this month.
“Credit conditions have tightened and the availability of credit appears to be worsening.”
The 25 basis point reduction in the Bank base rate was widely expected, however commentators warned that new borrowers are unlikely to see much benefit as the London Interbank Offered Rate (Libor) - the rate that banks lend to each other - continues to trade sharply above the BOE’s base rate.
Nevertheless, lenders including HBOS, Barclays, Lloyds TSB and the Nationwide building society said they would move standard variable lending rates to match the cut. That will save a borrower with a 25-year, £150,000 repayment mortgage about £23 a month, according to the Council of Mortgage Lenders.
Analysts and investors welcomed the BOE decision, but there were doubts on whether it would make any significant difference to the economy.
“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.”
April 11th, 2008 at 3:31 pm
[…] Interest rates cut to 5% Nevertheless, lenders including HBOS, Barclays, Lloyds TSB and the Nationwide building society said they would move standard variable lending rates to match the cut. That will save a borrower with a 25-year, £150000 repayment mortgage … […]