Bank lowers interest rates to 5%

UK interest rates have been cut to 5% from 5.25% by the Bank of England in an attempt to spur the economy in the face of the global credit crunch.

Interest Rates April 2008It is the central bank's third cut in interest rates since early December.

The Bank said that disruption in financial markets and tighter credit conditions could lead to a slowdown in the wider economy.

The largest mortgage lenders say they will pass on the cut to their mortgage customers who pay variable rates.

Decision welcomed

Business groups welcomed the decision and called for further cuts to shore up growth.

"It is vitally important to ensure that problems in the financial sector and in the housing market do not damage wealth-creating businesses," said David Kern, economic adviser to the British Chambers of Commerce.

"Undue delay in acting threatens to reduce the effectiveness of interest rate cuts that the MPC itself has anticipated already."

The cut had been widely forecast by economists.

"So far the Bank's gradual approach to cutting rates has been the right one," said Martin Temple, chairman of the EEF manufacturers' group.

"But, given how quickly the situation is changing, there are now greater risks to business and consumer confidence."

Mortgage rates

The UK's biggest mortgage lenders responded quickly, saying they would cut their standard variable mortgage rates by the full quarter of a percentage point.

Their mortgage rates which track the Bank of England's base rate will be cut automatically also.

The lenders that have said they will do this are the Halifax, Nationwide, Bank of Scotland, Britannia, Lloyds TSB, Cheltenham & Gloucester, First Direct, Royal Bank of Scotland, NatWest and Woolwich.

Most of the rest say they say they will take from a few days to two weeks to decide how to respond.

Despite this widely anticipated move by the Bank of England, many mortgage lenders have in recent weeks had to withdraw their most competitive deals for new customers.

Obtaining funding from the money markets has become more costly for banks as a result of the uncertainty in financial markets and a shortage of funds caused by the global credit crisis.

"This is good news for those borrowers with mortgages tracking the Bank base rate," said Michael Coogan, director general of the Council of Mortgage Lenders.

"But in these dysfunctional market conditions, the base rate is not in itself a good guide to the cost or availability of funds to lenders."

Before the rate decision, Alliance & Leicester said it was raising rates on its entire mortgage range for the second time this week.

Nationwide said it was raising interest rates on some of its fixed-rate products by between 0.12% and 0.32% from Friday.

Inflation risk

BBC economics editor Stephanie Flanders says that the quarter of a percentage point rate cut indicates that the state of the UK economy is broadly in line with the Bank's expectations.

That translates as slowing annual economic growth of between 1.5% and 1.75% this year, but not a recession, although inflationary pressures would still remain a problem.

The Bank said inflation could remain above the government's target of 2%, but should fall back, even if the price of oil and other commodities remain at their current high levels.

It did not mention the housing market in its statement, but analysts said recent downbeat news on property prices had influenced the nine-strong MPC.

The Halifax, the UK's largest lender, said on Tuesday that house prices fell by 2.5% in March, the biggest monthly decline since September 1992.

"The re-emergence of tensions in UK money markets, combined with evidence of a sharper deceleration in the housing market, has spurred the MPC into action," said Stuart Porteous, head of economics at RBS.

Source: BBC News

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