The Bank of England's base rate has been cut to its lowest level for over half a century, in a sign that policy-makers are worried that the property market and the wider economy are sliding further into recession. The Bank said its decision followed signs that inflation had fallen in October to an annualised rate of 4.5% and was at risk of undershooting its minimum 2% target as energy and food prices continued to fall and the 2.5% temporary cut in VAT took effect.
"Despite the actions taken to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remain extremely difficult," said the Bank "The [Bank's Monetary Policy] Committee noted that it was unlikely that a normal volume of lending would be restored without further measures."
'Pass it on', say agents
Estate agents immediately urged mortgage lenders to pass on the full 1% cut to customers. Peter Bolton King, chief executive of the National Association of Estate Agents, says: "This cut, in reality, won't do enough unless the banks play fair and pass the cut on to the homeowner. The NAEA is, once again, calling on all of the major lenders to commit to passing these savings onto the consumer.
"Low rates will increase confidence in the market, but will not increase mortgage approvals. Bringing buoyancy back to the market lies not only with low interest rates but crucially also in new lending. Government and lenders must do more to encourage first time buyers on to the property ladder in order to reverse the current downturn in the market."
Banks cool expectations
The cut was also welcomed by the Council of Mortgage Lenders, but it warned that some mortgage lenders would not pass the reduction on. CML director general Michael Coogan explains: "Lenders want to help their borrowers, both those who are in difficulty and those who are not. This will help to support the wider economy, and ultimately strengthen their businesses too. But the practicalities are complex, and lenders are trying to achieve a range of potentially conflicting objectives at the same time.
"They are simultaneously trying to build up greater levels of capital and liquidity, help borrowers in difficulty and reduce repossessions, keep rates as low as possible for borrowers and as high as possible for savers in a very low interest rate environment, support new lending, and pay the significant costs of the recapitalisation scheme which have fallen across a wider range of lenders than just the recapitalised banks themselves.
"As we have said before, not all lenders are the same. It is not realistic to expect them all to react in the same way to the rate cut - although where they believe they can cut mortgage rates, they will. To achieve its objectives to support the housing market, the Government needs to engage with all lenders, not just the very largest, and we look forward to helping with this."
Building societies, too
A similar message was delivered by the Building Societies Association. Adrian Coles, Director-General of the BSA said: "Homeowners will welcome the MPC's decision to cut the bank rate by 100 basis points to 2%. However, not all mortgage borrowers will find today's fall mirrored by their lender - building societies have to balance the interests of borrowers and savers. Although low interest rates are good news for borrowers, they are not so good for savers.
"Savers will be disappointed at today's news. Building societies which 'pass on' both this base rate reduction and the last could halve the interest which they pay to their investors in a very short period of time. A large proportion of the funds invested in building societies are held by those over the age of 55; building societies will wish to do what they can to protect pensioners from what will be, potentially, a very sharp reduction in their income."