The UK financial services industry was handed a small reprieve today after the Bank of England cut its base rate by 0.25% to 5.5%, the first change in the rate since July.
The cut has been welcomed by those in the financial services industry, though some have criticised the Monetary Policy Committee (MPC) for failing to pre-empt an economic downturn that now seems inevitable.
The Council of Mortgage Lenders (CML) says it was pleased with the MPC’s decision but continues to be concerned about liquidity in wholesale mortgage finance markets.
The CML’s director general, Michael Coogan, says: “A reduction in interest rates is exactly what the market needs and will benefit consumers. This will reduce the risk of payment shock for the 1.4 million borrowers coming off fixed rates in the next year.
“However, we still need the authorities to intervene more aggressively to open wholesale funding markets. There is a real need to minimise the shortfall between the demand for mortgages and lenders’ capacity to supply them.”
The Mortgage Advice Bureau also welcomed the decision, but was surprised with the MPC’s timing, saying inflation has crept above its target over the past month.
Speculating on the logic behind the decision, Brian Murphy, head of lending at the Mortgage Advice Bureau, says: “With a number of recent negative reports concerning slowdown in the economy, I believe the MPC have taken the decision to reduce rates in spite of the rise in inflation to ensure the growth required in the economy is not threatened further.”
Jonathan Cornell, director of Hamptons International Mortgages, also believed the decision was not taken lightly, with many factors influencing the Bank’s top policy makers.
“There were clear arguments from both camps. Initially those who err on the side of caution, or those possibly taking a long term view of risk, may have battled for a rate hold,” he says.
“However, in the other camp sit those members of the MPC who have been party to the recent reports of waning consumer confidence and dramatically decreasing house prices.”
However, some commentators say the Bank of England should have made this decision earlier, and should have reduce rates more dramatically to prevent an economic stall, which may already have begun.
Stuart Law, chief executive of Assetz, claims the Bank has done ‘too little, too late’ and is being overly cautious.
“Recent months have shown how indecisive the Bank of England is in more difficult circumstances and perhaps how much of an easy ride the Bank, and Mervyn King in particular, has had over the last decade of low inflation, low rates and good growth,” says Law.
“Now times are more difficult it is clear the MPC needs to move up a gear and take control by lowering rates further and even improving liquidity in the market. However, I expect we will see their ‘too little too late’ approach leading to more drastic rate cuts next year."
The Bank of England’s next interest rate decision is due on 10 January 2008 and the full impact of the latest rate change, including clearer signs of the economy’s health, will not become clear for several months.
However, homeowners across the UK will be breathing a very small, and almost inaudible, sigh of relief from today’s announcement.
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