The Bank of England has finally decided to give the UK consumer some breathing space to pay off debt...
The Bank of England has finally decided to give the UK consumer some breathing space to pay off debts and has reduced interest rates by 0.25% to 4.5%.
Alex Tarver, senior analyst at Fidelity International, says: "The MPC's decision to cut interest rates by 0.25% to 4.5% for the first time in two years today, had been expected by the market. Higher borrowing costs, oil prices above $60 a barrel, stagnant house prices and rising unemployment have been blamed for weaker consumer spending.
"Added to this, GDP grew by 1.7% in the second quarter from a year earlier compared with 2.1% in the previous quarter, and the UK economy grew at its slowest annual pace since 1993 in the second quarter.
"The move is widely seen as sending out the right signals - it is not enough to encourage consumer debt to get any higher, nor should it undo the good work they have done to dampen house price inflation. It is generally seen as good for business, as it reduces the costs of borrowing."
Nigel Lanning, UK equity fund manager at Allianz Global Investors, believes it is unlikely this cut will herald the start of aggressive interest rate cuts by the MPC. Although there might be another cut towards the end of the year - if growth slows - the Bank of England does not want to do anything to further encourage consumer debt and ignite the housing market.
The minutes of the August MPC meeting revealed that the vote to cut rates was much closer than expected. After the London bombings, most economists had assumed a large majority of the MPC were in favour of a cut - perhaps a 7-2 or 8-1 vote.
However, the minutes show it was a close call, with just five of the nine committee members voting for the cut.
The Inflation Report suggested the Bank expects UK growth to recover in the second half of 2005, driven both by consumption and by industry.
If there is another rate cut, Seven Investment Management does not expect the MPC will consider it until November when the next Inflation Report is released. However, this is only expected if there is a change in tone and the economic environment deteriorates further.
It is more likely the MPC will wait until the New Year to get a clearer picture of whether or not the economy is accelerating.
There are already signs that the UK housing appears to be bottoming. Reports from the Royal Institution of Chartered Surveyors (RICS) show that although overall market conditions remain subdued, the housing market's lowest activity levels may have passed.
The August RICS housing market survey indicates that price declines are at their slowest in five months. Even though sales are still down, it is not as much as it had been previously.
RICS spokesman Jeremy Leaf says: "Some signs of recovery are evident in the market. Would-be buyers have become more confident as a result of the interest rate outlook, while the economy continues to deliver steady growth, despite the past year's slowdown.
The recent terror attacks have not had any impact on house prices, even in London. The August rate cut will support a further rise in buyer activity, though there is little prospect of a renewed house price boom anytime soon."
According to Nationwide, in spite of a fair deal of bearish comment, the housing market has remained resilient this year following last year's interest rate hikes. Price inflation has slowed gradually, but it still positive, and actually has been creeping up since the end of 2004.
Bank of England 0.25% rate cut widely expected and welcomed.
Bank expects UK growth to recover in the second half of 2005.
House price declines were at their slowest in five months in August.
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