Bank of England slashes interest rates by 1.5%

The Bank of England has slashed interest rates by a further 1.5% to boost Britain’s ailing economy. Following an emergency 0.5% cut in October, the Bank’s Monetary Policy Committee (MPC) has taken drastic action again as its focus switches from inflation to recession.

Britain’s basic rate of interest now stands at 3%, but it is unclear how much impact this will have for households and businesses.

The Council of Mortgage Lenders (CML) has already said its members are unlikely to pass on the rate cut to borrowers.

In a statement issued last night, the CML said: “It is important to allow for the fact that in the post-credit crunch environment, where Government and regulators expect lenders to operate lower-risk and higher-capital lending businesses, the pricing of mortgages relative to benchmark rates is highly unlikely to return to the very narrow margins of the pre-crunch era.

“And lenders will need to take account of the possibility of higher provisioning and losses in an environment of higher arrears and possessions. A decision not to follow a base rate reduction does not imply that the lender is ‘profiteering’.”

Further cuts are expected in the coming months, and some economists believe the MPC may reduce rate as low as 0% to try and stimulate the economy and reduce the effects of recession.

Bank of England ignores liquidity pleas

The Intermediary Mortgage Lenders Association has warned that appeals to the Bank of England to restore liquidity are continuing to fall on deaf ears.

In an exclusive interview with Mortgage Strategy at the 20th annual IMLA dinner last week, Godfrey Blight, chairman of IMLA, said it’s vital that BoE governor Mervyn King restores investor confidence in mortgage-backed securities to improve liquidity.

He says: “I think King is on another planet – he needs to come back down to earth and address the problems with liquidity and mortgage availability. He has put this country back 20 years.”

Over the past month, IMLA has called for the government to address liquidity problems more than once to no avail.

King has confirmed that although the £50bn Special Liquidity Scheme will continue for the next three years, new assets will not be considered after its original closing date of October 21 this year.

Instead, next week the BoE plans to publish a consultation paper in favour of a permanent liquidity insurance facility.

In an address to the Treasury Select Committee, King says: “It is not the purpose of central bank liquidity insurance to provide a source of long-term funding to the financial system – indeed, it cannot do that. Only private savers or taxpayers via the government can provide such funds.”

Tony Ward, managing director of Home Funding, says relying on savers is not a sound solution to the crisis.

He says: “Retail deposits are not going to be the sole solution to liquidity problems. You can’t use short-term retail deposits to fund 25-year mortgages.”

Experts from across the industry say it’s unlikely that the BoE will echo the US Treasury’s intervention into beleaguered lenders Fannie Mae and Freddie Mac.

Last week saw the effective nationalisation of the two agencies when the Federal government committed to a $200bn capital injection, new credit lines plus a plan to buy their MBS.

Bank of Englands MPC holds bank rate at 5.0%

The Bank of England’s Monetary Policy Committee yesterday voted to keep the base rate at 5.0%.

Ray Boulger of John Charcol said: “After The Chancellor’s frank comments at the weekend that Britain is facing “arguably the worst” economic downturn in 60 years which will be “more profound and long-lasting” than people had expected, it is probable that the MPC discussed very seriously whether Bank Rate should be cut as early as today. However the current elevated level of the CPI, with further increases to come, will have been an obvious obstacle to this.”

“Because today’s no change decision by the MPC was widely expected the main focus will be on the minutes, published on 17 September, to see whether David Blanchflower was still a lone voice in voting for a cut and whether Tim Besley has at last recognised that an increase would be inappropriate as the economy rapidly deteriorates. Mr Blanchflower has already indicated that he expected to vote for a 0.5% cut and it is likely there was a three way spilt for the third month running, but this time with the votes being for no change, a 0.25% cut and a 0.5% cut.

RICS chief economist Simon Rubinsohn said: “The decision of the Bank of England to leave interest rates at 5% was to be expected in view of on-going concerns about the inflation outlook. However, with the push from commodity prices beginning to ease and little sign of any follow through from headline inflation into wage settlements, the Bank needs to shift its gaze towards the bleak outlook of the economy. Growth is set to contract during the second half of this year and with the credit crunch still firmly entrenched, the risk is that it will remain fairly flat during the early part of 2009.

“Against this backdrop, unemployment will begin to rise in a more pronounced fashion. If evidence continues to stack up against the ailing economy, a cut is conceivable at the October MPC meeting although November still seems the more likely option”.

Base rate held a 5.0%

The Bank of England Monetary Policy Committe voted today to keep the base rate at 5.0% for the fourth consecutive month.

Barry Naisbitt, chief economist at Abbey, said: “The Bank of England held rates at 5.00% today. Market commentators had expected no change this month, reflecting a mix of factors. Last month’s decision to hold rates had two dissenting votes, one for a rate cut and one for a rise. However CPI inflation has now reached 3.8% and is expected to rise further in the coming months.

“The Monetary Policy Committee (MPC) has clearly signalled its concern that higher inflation may feed through into elevated inflation expectations and so into continued high inflation. But there are increasing signs of slowing output growth. In these circumstances, leaving rates on hold is effectively bearing down on inflation. So the majority of MPC members must have judged that the most recent evidence of slowing economic activity provided a balance against the inflation indicators that are high and expected to rise further.

“The Inflation Report, which is published next week, should give some more information on how the MPC members judged the risks in what is a highly uncertain economic situation. If the slowing in economic activity is occurring more sharply than anticipated, and supports lower inflation in the medium term, a rate cut later this year or early next year, could still be on the cards. However, much will depend on how inflation develops in the coming months.”

King wishes BoE had been given power to trigger special resolution regime

Bank of England governor Mervyn King has admitted he would have preferred that the Bank had been granted the power to pull the trigger for the special resolution regime as well as the FSA.

Speaking at the Treasury select committee this morning King said that the Bank would be allowed to make recommendations to the FSA over when to trigger the regime for a failing bank, but it would not make the final decision.

He said: “I would have preferred if we had the power to pull the trigger. The Treasury decided that was not a power that we would be given. We lost the argument.”

King also said that any recommendations the Bank makes about triggering the regime and the FSA decides not to follow may not be made public unless the struggling bank actually enters the regime.

King added that it would be a mistake to rush through banking reforms and that there was a lot of detail still to be discussed. He also said he was in favour of some form of risk-based pre-funding for the depositor protection scheme. He said that over ten years the fund should be in its billions.

Also speaking in front of the Treasury committee later this morning, economic secretary to the Treasury Kitty Ussher MP said: “I think it is entirely right that the members of the Tripartite authorities should be able to communicate in private.

“I also think it is entirely right that it is the responsibility of the FSA to decide when the threshold conditions are met so that it triggers placing an institution into the special resolution regime when capital adequacy and other conditions are not met.”

Banks want BoE to extend liquidity scheme

The Bank of England will be lobbied by high street banks today to extend the special liquidity scheme, put in place three months ago to help free up money markets which have been frozen by the credit crunch, reports The Guardian. The banks are thought to be keen to ensure that the scheme, which allows billions of pounds to be pumped into the financial system, is fine-tuned as it is not becoming any easier for banks to borrow money on the financial markets.

Many need access to funding either from the money markets or from the Bank of England’s special scheme in order to offer mortgages to customers and loans to businesses.

The banks are thought to have drawn up a number of suggestions for discussion with the Bank at a routine meeting today.

The scheme was rushed into place in April shortly after the near-collapse of US bank Bear Stearns. The rescue of Bear Stearns, orchestrated by the US Federal Reserve, raised fresh fears about the solvency of the banking system and caused financing among the banks to dry up following last summer’s credit crunch.

Among the items for discussion at the meeting between the treasurers of the major lenders and Bank officials, is an idea from at least one of the lenders to extend of the type of assets that banks can pledge as collateral in the existing scheme.

The parlous state of the equity markets on both sides of the Atlantic has sent investors piling into the controversial practice of shorting, which has driven fees to more than double in just nine months, reports The Independent.

The price of borrowing stock in London’s blue-chip companies has risen twofold since last October, according to Data Explorers, which specialises in stock-lending information, and went up as much as four times in January.

The data group added that the cost of borrowing stocks from mid-tier companies on the FTSE 250 has trebled in the past 10 months, although it did not release the actual size of the fees. In the UK, banks and housebuilders have been particular targets of the short sellers this year.

Hedge funds suffered their worst start to the year for almost two decades in 2008, although there was some good news as Man Group, the giant UK alternative asset manager, posted solid results for the last quarter, reports The Independent.

As the markets have weakened, hedge fund performance has suffered more than in the wake of the dot.com bust, as managers have had to write down billions or face closure. Peloton Partners, set up by Ron Beller and Geoff Grant, and Sailfish Capital have closed, while the private equity giant Carlyle ended its hedge fund business, and Citigroup in effect shut Old Lane, the manager it bought less than a year before.

Hedge Fund Research, a US analysis group, said the industry index it compiles was the worst in the first six months of the year since it began tracking in 1990.

This article was first published by IFAonline, part of the Incisive Media group.