Lenders stave off effect of rate cut

The Bank of England chose to cut interest rates by a quarter percentage point yesterday to 5.25 per cent amid signs of an economic slowdown. The move was widely expected by economic analysts, as the Bank's Monetary Policy Committee attempts to increase consumer confidence as debt, higher food and fuel bills impact on their spending.

Last month it voted 8-1 to hold interest rates at 5.5pc so it came as no surprise that this time round they took action to head off the effects of the credit crunch. The Bank said in a statement: "Inflation at 2.1% in December was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months. The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below target in the medium-term against the risk that elevated inflation expectations keep inflation above target."

The cut follows recent reductions in the US rate, where the Federal Reserve slashed its rate from 4.25% to 3%, taking a more aggressive approach to a slowdown. Some experts say the Bank may have little choice but to cut rates again this year should economic conditions deteriorate further.

However, the CBI welcomed the cut and said it was pleased there had not been a bigger reduction. Ian McCafferty of the CBI said: "It is clear that it is a delicate balance with inflation pressures. A quarter point now and then watching very carefully for how inflation develops in the coming months is the best strategy." However, the British Chamber of Commerce's David Kern said: "Threats to growth are much more acute now than risks of higher inflation, and we would have welcomed a bold UK move to 5% today."

But while borrowers will be pleased at the prospect of falling mortgage repayments, they may have to wait some time for lenders to pass on the cut. Nationwide, Halifax, Coventry Building Society, Abbey and Royal Bank of Scotland and NatWest can polish their haloes as they all pledged that they would be cutting their standard variable rates (SVRs) by a quarter point after the MPC made its announcement.

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Lloyds TSB, which also offers mortgages under the Cheltenham & Gloucester brand, the Woolwich, HSBC and First Direct are also reducing their rates by the same amount and confirmed that they would mirror the MPC's decision ahead of its announcement.

08 February 2008 © Moneyextra.com

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