More Rate Cuts To Come, Suggests Bank
The Bank of England has admitted that it has been surprised by the scale of the downturn in the housing market, and it is also wary of the reduction in credit that is available to families. These were two key reasons why the Bank's Monetary Policy Committee (MPC) decided to knock a quarter of a percent of the base rate at the beginning of December.
In minutes from the meeting the Bank also said that it may have to cut interest rates 'aggressively' in 2008 to avoid a return to the misery of the recession of the early 1990s. The vote for the cut (the first cut since August 2005) to 5.5% in December was unanimous as the MPC's fears for the UK economy outweighed their ongoing concerns for inflation.
Minutes from the MPC meeting said: "The worsening financial market turmoil, and the consequent tightening of credit conditions, had increased the downside risks to activity and inflation in the medium term. Signs of slowing growth in the industrial world were already apparent. That suggested a substantial loosening in policy might be needed."
Further interest rate cuts will help avoid an increase in the number of repossessions - with the Royal Institution of Chartered Surveyors (RICS) forecasting that the number could reach over 120 a day in 2008, and increase of 50% on the figures for 2007. RICS also said that it expected house prices to stagnate in 2008, to end 12 years of continued growth. House price stagnation, coupled with inflation, would mean that house price values would actually fall in real terms.
Simon Rubinsohn, chief economist at RICS, said: "2008 will prove a difficult year for the housing market, but with falls likely in the base rate the housing market should be provided with a stable platform. The effect of the credit crunch will dissipate slowly, meaning that those seeking to obtain mortgage finance in the first half of 2008 may struggle."
Further interest rate cuts would bring much needed relief to millions of UK home owners who have been struggling with higher mortgage rates and mounting credit card debts.
Good news for the Bank of England, after it had reduced the base rate, as that inflation held steady in November at 2.1%. Any rise there would have thrown things into turmoil once again. However, rising oil and food prices continue to be a concern, and they may only be countered by reductions in shops as retailers strived to increase their sales over the Christmas period.
Further interest cuts also look likely in the wake of figures from the Building Societies Association (BSA) and the Council of Mortgage Lenders (CML), who both reported a fall in lending in November. The CML's lending was down 8% on last November, and the BSA fall was nearly 11% over the same period.
Economists now expect three further rate cuts in 2008, which would take the rate down to 4.75%, and the first cut could come as early as January.
David Brown of Bear Stearns, said: "With the MPC voting unanimously in favour of easing, a back-to-back cut could be on the cards at the January MPC meeting."
Published on January 1, 2008
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