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Bank of England to cut interest rate again
Jonathan Prynn, Consumer Affairs Editor19.11.08
A CUT in interest rates in time for Christmas became a virtual certainty today.
The current three per cent rate is set to fall to 2.5 per cent or even two. This would be the cheapest cost of borrowing since 1951 and equal the lowest rate since the formation of the Bank of England in 1694.
Two weeks ago the Bank stunned the City with a 1.5 per cent cut, the biggest since 1981.
But today minutes from its rate-setting Monetary Policy Committee revealed that even more drastic action - a two percentage cut - was seriously considered.
The Bank's admission means that at least a half point cut, and possibly a full point, is almost unavoidable when the MPC makes its next decision on 4 December, according to City experts. The MPC only held back on 6 November from two percentage points because it was worried about shocking the City and damaging the pound.
It also decided to see what measures to boost the economy Chancellor Alistair Darling will unveil in his pre-Budget report on Monday. A cut would bring an immediate benefit for three million homeowners on tracker mortgages, although borrowers with the Nationwide would only get part of the windfall. The building society has said it will not pass on any benefit once base rates fall below 2.75 per cent.
A family with a typical London tracker mortgage of around £200,000 would see their monthly payments fall by around £55 to £1,011 from 1 January if there is a half point cut and by £110 to £957 if it is a full point.
Homeowners on mortgages linked to standard variable rates are unlikely to get the full benefit after Mr Darling persuaded reluctant high street lenders to pass on the full 1.5 per cent this month. The minutes published today reveal that all nine members of the MPC voted for the 1.5 per cent move but also show that its members felt that “a very signficant reduction in Bank rate — possibly in excess of 200 basis points (two percentage points) might be required to meet the inflation target in the medium term.”
The inflation target is two per cent but the rate is now expected to drop well below that by this time next year.
City economists said the minutes “open the door very wide” for further cuts. Howard Archer, chief UK and European economist at forecasters Global Insight, said the scale of the cut depends on how much money Mr Darling decides to pump into the economy.
Reader views (13)
i am so thrilled that the rate has been dropped our mortgage shot up after we bought our home in october 2006 of 200 per month, its come down this month by 250 pounds,to 875, i just hope tht it comes down again and it getts passed on to us, as i have been told the mortgage companies dont have to pass it on this time?
- Carol Evans, swansea
Our current fixed rate just come to an end, I opened my letter from Barclays,(our current lenders), who informed us that we would be switching to there variable rate of 7.14%. I nearly fell off my breakfast stool, after speaking to them via the telephone I was informed that the variable rate was now 6.64%, saving us nothing per month infact increasing our mortgage payments considerably. With the bank of England base rate at 3% can somebody explain to me how a bank the size of Barclays get away with ripping off its loyal customers? We have never missed payments on our mortgage and have been very loyal to the bank, but this just leaves me with a bad taste in my mouth, because now it affects me, I can see for myself how greedy the bank has become!
- Patricia, Norfolk,England
Leave the interest rate alone some of us have to live on it. The rate dropped dramatically 5 years ago forcing a high rise in property prices and no doubt contributing to the inflation.
- Irene, leicester england
Well after the last interest rate slashing I'm still waiting for First Direct to inform me that my repayments are going down!
- Mark, South-East London
Adam...will you really...? And what exactly are your 'alternatives'. Fact is, there is no safe harbour at the moment. The bank will still be the best place to hold the money. Either that or spend it and enjoy yourself...
- Andrew, London, UK
someone's maths could use work:
"A family with a typical London tracker mortgage of around £200,000 would see their monthly payments fall by around £55 to £1,011 from 1 January if there is a half point cut and by £110 to £957 if it is a full point."
Interpolating this backwards implies a margin tracking of 3.5% OVER base rate. there is nothing typical about that. put another way, a mortgage of 200K would need to assess at 6% to get monthly payments of £1,011; with a 1/2 pt cut, this puts the margin at 350bp which is nonsense.
a typical margin would be much lower. for example my lifetime tracker tracks at 0.49% over, which may not be typical (though not uncommon) nut neither is 3.5% typical either.
- Scott, London
I think savers need to band together to put pressure on banks for this not to happen.
Like others have mentioned I will be putting my money elsewhere if a further cut happens.
- Jon Vanner, Hoxton London
This could cause a run on the banks that would make Northern Rock look like a kid breaking his piggy bank open.
- Dereck, London, England
If the interest rates get too low I will remove my money from my current savings accounts; there are alternatives.
- Adam J, Newcastle, UK
Why aren't stories like this pilloried as much as the average Shadow Chancellor? They are just as likely to cause a "run on the pound" (which wouldn't have happened in the first place if the government was as good at running the economy as it tells us it is, but hey-ho).
- Nobby Clark, Perth, Scotland
With the possible reduction in Interet Rates in December I earnestly hope and pray that sympathy and consideration will be given to expatriates in Europe and world wide. It seems that, so far, nobody cares about our plight. When the pound depreciates we suffer a loss of pension values and some a loss in earnings and there is nowhere for us to gain compensation!!!
- Arthur Lincoln, arthur.lincoln@skynet.be
A further reduction in Interest rates would see me withdrawing all my cash and putting it in a Safety Deposit box.
If I'm not going to profit from putting it into a Bank, I don't see why they should profit off my hard-worked back.
- Cap, london
What about the poor savers? Why not make savings income tax-free to compensate for the excesses of the borrowers who are being bailed out?
- Roger Slade, Winchester, Hampshire, England
