Bank of England lowers interest rate to 5.0%

On 10 April 2008, the Bank of England announced a reduction in interest rates of a quarter per cent from 5.25% to 5.0%. The move constitutes the third fall in interest rates in the last five months and brings the base rate to its lowest level for more than a year.

The decision follows recent house price reports highlighting a significant fall in mainstream property prices and the continuing impact of the credit crunch. According to the Halifax, house prices fell by 2.5% in March, the largest monthly fall since 1992, while the Royal Institution of Chartered Surveyors stated that the level of new buyer enquiries has fallen to historical lows.

While on the surface, the rate decision appears to be good news for homeowners, who are already under significant inflationary pressures, those on a variable rate mortgage expecting to see a reduction in their mortgage costs may well be disappointed.

The impact of the credit crunch on the money markets has meant higher mortgage funding costs for the banks and there are genuine fears that many lenders will fail to pass on the rate reduction. One in five lenders failed to pass on the interest rate reduction to borrowers following December and February reductions, while many others failed to pass on the reduction in full, lowering rates by just 0.15%.

Even in the run up to this month's decision, Nationwide announced rate increases across many of its fixed rate products, while Alliance & Leicester announced that it too would be raising interest rates on some of its mortgage products for the second time in three days.

Melanie Bien of Savills Private Finance believes the news will be well received by consumers if the rate reduction is passed on by lenders, but believes the benefits are unlikely to be so forthcoming among those looking for a new mortgage.

Bien comments, "The Bank's decision to reduce rates by a quarter percent comes as no shock and was a widely expected move. While those on discounted-variable rate mortgages will be pleased with cheaper monthly payments, it does not necessarily mean that the pricing of new mortgages will come down.

"Indeed, lenders have recently been moving in the other direction and we expect this to continue as the lack of liquidity in the market means the cost of new mortgages - both fixed and trackers - continues to rise."