6 November 2008

Bank of England Cuts Base Rates to 3% as Halifax Reports More Property Gloom

In a desperate move to stimulate the flagging UK economy the Bank of England's monetary policy committee have slashed interest rates to 3%, the lowest level for over 50 years.

The decision surprised the financial community who were expecting a rate cut of a half of one percent, with some calling for a full one percent cut.

The news will delight UK manufacturers and homeowners who have been petitioning for a sharp and sustained cut in rates for many months, however, the concern now is whether the banks will be able to pass on the lower base rates to their customers.

In more stable economic conditions the base rate could and should have been passed on in full, but in these extraordinary times part of the rate cut is likely to be retained by the banks to restore their profitability.

It follows that, while it is unlikely that everyone will feel the full benefit of the 1.5% cut rates in the weeks and months ahead, on average, consumers will enjoy a reduction in the cost of borrowing between a half and one percent.

At 3% the UK has the lowest base rate since 1954; however, it remains to be seen whether it will be enough to restore the confidence of consumers who have seen the value of their property fall 15% in the last twelve months and, according to the Halifax 2.2% in October alone.

What businesses and battered homeowners will be grateful for, however, is that yesterday the penny has finally dropped at the monetary policy committee that the UK economy is as flat as a pancake and now acknowledge that drastic action is required to kick-start the economy.

With the equivalent interest rate in the US set at 1% and Japan at three tenths of 1%we could be seeing base rates fall even further, perhaps as low as 2% by the spring. It follows that with Europe conservatively sticking to 3.25% the Euro is likely to remain strong against the pound.

No comments: