Desperate times call for desperate measures and, whilst the UK Government has outlined a two year mortgage holiday, the Bank of England has responded to the ongoing financial crisis with yet another interest rate cut, taking the base rate to two per cent…
Cutting back
The Monetary Policy Committee (MPC) has cut the UK base rate to two per cent from three per cent, a bold one per cent cut on top of last month’s 1.5 per cent.
The base rate was at two per cent for most of the 1930s and 1940s and was last at two per cent in 1951, thus the rates are now at their lowest for more than half a century.
The base rate has not been below two per cent since the Bank of England was founded in 1694.
The cut follows news from the Halifax, the UK’s biggest mortgage lender, who said that the average property in the UK was now valued at £163,605, nearly £31,500 lower than 12 months ago.
The Bank is putting out a clear message that, with the economy slowing sharply, it is prepared to take drastic action.
“We will take whatever action we feel is necessary on interest rates to steer the economy back into calmer waters,” Governor Mervyn King told a parliamentary committee last week, before the cuts.
But some industry experts are arguing that the latest cut is still not enough to boost the market and stop the slide into recession. Willem Buiter, a former member of the Bank’s policy-making committee, now at the London School of Economics, has said that rates will need to fall to zero by next year, because the recession will be ‘deep’ and ‘prolonged.’
Stuart Law, Chief Executive of Assetz, said, “This latest drop in interest rates will help reduce the duration and depth of the recession and reduce future Government borrowing.
“However, public awareness is growing that the Bank of England has left it far too late to avoid a recessionary period.
“Even the MPC’s own members are rebelling by admitting they failed to act in time to protect the economy from the worst of the downturn. I will not be surprised if base rates end up at zero per cent in spring 2009,†added Mr Law.
Peter Bolton King, Chief Executive of the National Association of Estate Agents, said, “This cut, in reality, won’t do enough unless the banks play fair and pass the cut on to the homeowner.
“The NAEA is, once again, calling on all of the major lenders to commit to passing these savings onto the consumer.
“Low rates will increase confidence in the market but will not increase mortgage approvals. Bringing buoyancy back to the market lies not only with low interest rates but crucially also in new lending.
“Government and lenders must do more to encourage first time buyers on to the property ladder in order to reverse the current downturn in the market.
“This interest rate reduction, coupled with the mortgage assistance measures announced yesterday, act as a firm commitment to restoring health to the market. The NAEA looks forward to hearing what the Government now intends to do to assist first time buyers at this time,†added Mr Bolton King.
According to mortgage advisers, John Charcol, only 10 out of 69 lenders have passed the last two rate cuts in full to their customers on standard variable rate mortgages.
However, Lloyds TSB, which also lends under the Cheltenham & Gloucester brand, has already pledged to pass on any reduction to its borrowers on standard variable mortgages in full.
For those mortgage customers on tracker deals – which track the Bank Rate – they may not get the full benefit of further cuts in rates.
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