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UK rates cut to one per cent

Thursday, February 05, 2009

Catherine Deshayes

In line with predictions, the Bank of England cut interest rates to one per cent today - this latest cut is the fifth consecutive rate slash and takes the base rate to an all time low as the Bank grapples with the deteriorating UK economy...

Despite the growing calls from the industry to hold rates at 1.5 per cent, this cut to one per cent was predicted by trade bodies more than a month ago.

The dramatic reductions - from five per cent last October - have been good news for most borrowers with tracker mortgages but the overwhelming response to the latest cuts seemed to be that they would do little to help consumers unless the lenders passed them on, thus bringing some liquidity back into the market.

Not all those who have trackers will benefit though -some lenders have implemented ‘collars' on their mortgages which means that the rate borrowers pay cannot fall any further.

Today's decision follows the International Monetary Fund's (IMF) forecast that Britain would suffer worse than all other advanced nations in the worst global slump since the Second World War.

Philip Selway, Managing Partner of property buying consultancy The Buying Solution, told TheMoveChannel.com, "Provided the lenders pass it on, the 0.5 per cent cut in interest rates coupled with falling property prices should further stimulate those who are in a position to buy. 

"Clients who need to purchase this year are aiming to do so whilst house prices are still on a downward slope, and with savings rates at an all time low, now is looking like a good time for them to protect their capital in the long term by way of property purchase," he added.

Jonathan Turpin, Chief Executive of Moveme.com said, "This latest cut will mean very little to most homeowners on fixed rates and those where lenders have been slow to pass on previous rate cuts.

"In the longer term, low interest rates will allow people to borrow at more reasonable levels and take advantage of falling house prices, however, if lenders do not look at reducing the higher loan to values and expensive arrangement fees recently imposed, first time buyers especially will find it just as tough to make their first purchase," added Mr Turpin.

The Building Societies Association had warned against cutting rates in a bid to protect the interests of savers, who have seen returns dive by 75 per cent in recent months.

They argue that it is not logical to hit savers with rate cuts when they represent the one group who may be able to buy and resume the process of lending.

Adrian Coles, Director-General of the BSA, says: "Mortgage availability, rather than the cost of mortgages, has become a more pressing issue over the last few months.

"This suggests that what is important to potential borrowers is maintaining the flow of mortgage funds to the market rather than reducing interest rates further.

"We need to ensure that those with at least some capacity to supply funds for mortgage lending - personal savers - are encouraged to do just that," he added.

There are also fears that borrowers will hold out for better deals in line with their expectation that rates will fall below one per cent.

Meanwhile, foreign investors are keen to snap up UK properties at a bargain price, potentially pushing prices up again before the next generation of Brits can get their hands on a first home.

The question now seems to be ‘What will the Bank of England do when rates reach zero and there is nothing left to cut?'

They may well be forced to resort to ‘quantitative easing' which means increasing the supply of money in the economy to buy assets from banks, or boosting the reserves that the banks hold on deposit in the Bank of England.

Picture by Chris Beach

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