Inflation fall makes December rate cut more likely

The fall in the Consumer Price Index to 4.5% has led Mortgages for Business to believe that rates will be cut further in December.

The buy-to-let broker has also stated that it wouldn’t be surprising if the Bank of England slashes a further 1% off Base Rate before the end of the year.

While the spread between LIBOR and Base Rate remains wide – three month LIBOR currently stands at 4.15% – mortgage rates will be slow to follow suit although the market is starting to see some improved pricing in residential mortgage rates. A couple of lenders this week have launched fixed rate mortgages at 3.99% and tracker rate mortgages are available from 4.39%.

David Whittaker, managing director at Mortgages for Business said: “Buy-to-let mortgage rates will be slower to return and it may not be until early next year when confidence returns to the money markets and lenders set their targets for lending in 2009. Rest assured, at Mortgages for Business we are in constant contact with all the main lenders and will send updates out to our clients as soon as there is some positive movement.”

LibDems fear 0% interest rates

After the Bank of England predicted yesterday that inflation could fall below 1% next year, the Liberal Democrats fear that we could be heading for zero interest rates, coupled with rising unemployment.

Liberal Democrat Shadow Chancellor, Vince Cable said: “It’s clear from the today’s figures that we’re heading for very high levels of unemployment with falling inflation. This could soon become negative inflation, with prices actually falling.

“The Governor of the Bank of England is right to say that interest rates will fall a lot further. We may find ourselves in a world of zero interest rates before too long.

“The actions we have urged, including drastic interest rate and tax cuts, now attract wide political support. However, the key problem is that despite the Government’s recapitalisation of the banks, the financial system is still completely gummed up.

“Ministers must consider more drastic action to ensure that credit flows on reasonable terms to solvent borrowers.”

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.

NLA doubts banks will pass on interest rate cuts

NLA Mortgages, the free sourcing and quotation system for landlords, has it’s doubts that today’s expected cut in bank base rate will encourage lenders to pass on the savings to landlords.

Simon Gordon, head of communications at the National Landlords Association, said: “It’s about time lenders started to play ball and pass these latest rate cuts on to landlords. Part and parcel of the Government bailout was the requirement for lenders to start lending to consumers. It’s critical for the health of the property market for landlords to have access to mortgage finance.

“Despite recent reductions to the base rate, there is very little evidence that banks and building societies are helping buy-to-let borrowers by cutting their rates. At a time where rental demand is on the up across the UK, many professional landlords will be looking to expand their portfolios, thus providing much needed housing.

“Demand for buy-to-let mortgages is high but landlords are being frustrated by a lack of suitable products. With fewer people able to get their hands on decent deals, there is a danger that the housing needs of many tenants will not be met.”

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.”

MPC members voted 7-2 to hold base rate

The last minutes from the Monetary Policy Committee (MPC) meeting held on 9 and 10 July show that the members voted 7-2 in favour of maintaining base rate at 5.00%.

The two members who voted against keeping base rate on hold were split in their decision, with Tim Besley preferring an increase of 0.25% and David Blanchflower preferring a reduction of 0.25%.

The minutes highlighted that inflation was still a major cause for concern, with the latest figures being higher than predicted. Inflation currently stands at nearly twice the target level and with many analysts predicting that a recession may be coming our way sooner rather than later, the MPC faces a tough balancing act over what will best help the UK economy.