The scale of the recession has been dramatically illustrated by the decision of the Bank of England to cut its base rate to a mere 1%. This is a half a per cent cut on a rate that was already the lowest in the bank's 315 year existence.
Weak indicators
Weak indicators were quoted by the Bank as the reason for a further cut – the base rate has now fallen by 4.5% since January last year. The Bank was worried at deteriorating business and household confidence, falling output in the UK and other advanced economies and a slowdown in the emerging economies, including China.
With credit still hard to come by – both for homebuyers and consumers – there is little hope of any quick turnaround, suggests the Bank. Instead, it expects the economy to get worse as businesses cut existing stocks and reduce orders for replacements. Unemployment is likely to increase as a result, further undermining confidence in the housing and retail markets.
Nor is this latest cut necessarily the end of the line - the Bank's Monetary Policy Committee warned that there is a continuing risk that the economy will undershoot the medium term target of 2% inflation. This is despite prices going up on imported goods, caused by the heavy fall in the value of sterling on world currency markets.
Cautious reaction
The industry body for mortgage lenders reacted cautiously to the decision, worried that it would encourage consumers to spend rather than save – reducing the pool of money available for home loans. The Council of Mortgage Lenders' director general Michael Coogan says: "While borrowers on tracker rates will welcome the rate cut, it is doubtful whether it will create the conditions to achieve significantly more new lending.
"It will not be a surprise if banks and building societies try to prioritise savers in this very low interest rate environment. For borrowers who remain in employment, affordability is unlikely to be an issue at the moment. But, if the rate cut helps businesses, and therefore helps to keep people employed, this will at least help to cushion the impact of the recession on the housing and mortgage markets. In practice, rate cuts alone will not achieve this objective as they have become a more blunt instrument - they are only one of the tools being used to try to help the UK weather the recession."
'Assault on savers'
The Building Societies Association was more forthright. Its director general, Adrian Coles, says: "The rate cut is an assault on savers who will have seen their interest payments drop by 83% since July 2007. Savers dependent on interest income have not seen prices fall by a similar amount – their lifestyles have taken a significant blow.
"But the decision is also bad news for mortgage borrowers. Although the cut will benefit borrowers with tracker or variable rate mortgages, research by BSA has found that concern over getting a mortgage or getting a large enough mortgage is a much greater worry than affording mortgage repayments. Against such a background, [the] decision means that people are less likely to save and the flow of funds into the mortgage market will be further disrupted."
Unimpressed
Estate agents were similarly unimpressed. "Interest rates are becoming a distraction for consumers and business alike," argues Peter Bolton King, chief executive of the National Association of Estate Agents (NAEA). "A cut does not help house hunters if major lenders do not pass it on - it simply increases the pain for savers.
"The reality for many first-time buyers in Britain today is that the only bank that will help with a deposit is the Bank of Mum and Dad. The NAEA knows that there is a huge demand for property out there and that potential first-time buyers are exploring the market in larger numbers than we have seen for months."
Limited optimism
Some banks responded positively. Lloyds TSB's chief economist, Trevor Williams, says the base rate cut is necessary "to tackle the tough economic conditions now facing the UK." But, he warns, the decision is largely irrelevant. The "cut means that the UK needs to be ready to face a period where the ability of base rates to be used as a lever on the economy is almost entirely diminished", he cautions.
A more optimistic Barry Naisbitt, chief economist at Abbey, adds: "The cut should help to bolster consumer and business confidence at a clearly very difficult time in the economy."
Passing it on
Several banks and building societies quickly announced they would pass on the base rate cut. Lloyds TSB and its Cheltenham & Gloucester subsidiary are cutting Standard Variable Rates by 0.5% to 3%. Others passing on the full cut include Nationwide Building Society (whose SVR also falls to 3%); Halifax (4% SVR); and Skipton Building Society (4% SVR).
HSBC said that 95% of mortgage borrowers would benefit from a cut in rates, or were on fixed rates that are unaffected. But it said it was in the processing of reviewing its SVR, which at present remains at 3.94%.