The Monetary Policy Committee reduce the Bank of England base rate by quarter of a percent.
In a move largely anticipated by the financial community the Monetary Policy Committee have today announced a 0.25% cut in the Bank of England base rate.
Now sitting at 5%, this is the third quarter percent cut in the past five months and as a result, has reduced the base rate to its lowest value since December 2006.
Many are taking this as a clear sign that the MPC are replacing their ‘hold stead’ approach with more dramatic measures designed to stabilise what has become a very shaky economy.
The MPC themselves acknowledge that their decision was a careful one, designed to mediate the risk of above-target inflation driven by the increasing cost of commodities, against the potential for below-target inflation as a result of the current disarray afflicting the money markets.
However, in view of this week’s news that house prices have now started to drop, coupled with the apparent turmoil that tightening credit conditions are causing for both banks and borrowers alike, economists are predicting that more extreme cuts will be necessary by the end of the year.
While today’s announcement by the MPC will come as welcome news for struggling homeowners, it may yet be too early to breathe a sigh of relief. As, while several lenders have already confirmed that they will be passing the full quarter percent cut onto their Standard Variable Rate customers, there is no guarantee that the same reduction will be applied to the fixed mortgage products that many borrowers favour.
In fact, since the MPC made its first of these cuts last December, fixed rate products have gone on to become steadily more expensive as a result of the worsening credit conditions.
Those with tracker mortgages may also be left wanting as many of these deals are designed to fluctuate in line with the cost of inter-bank borrowing (known as the Libor rate) and not the Bank of England base rate. As the Libor rate still remains high, today’s cut is likely to make little difference to the cost of these products.
So, while today's cut may not provide immediate assistance for homeowner's feeling the squeeze if, as planned, it helps the economy to stabilise in time we will all eventually feel the benefit.
