Interest rates cut to five per cent

Bank of England cuts rates to five per cent

Thursday, 10, Apr 2008 12:00

Interest rates have been cut to five per cent, as the Bank of England reacts to slow growth in the UK economy and house price falls.

Lenders are now under pressure to pass on the 0.25 per cent cut to lenders, with analysts and borrowers expecting the reduction.

High London interbank offered rates (Libor) has meant Bank of England interest rate cuts in December and February have not been passed on to new borrowers and mortgage rates have in fact increased.

Data from the Council of Mortgage Lenders show repayments on a variable rate repayment mortgage of £150,000 should fall £22.98 after a 0.25 per cent rate cut, while on an interest only mortgage repayments will fall £31.25.

Further interest rate cuts are now expected later in the year, but the monetary policy committee (MPC) still needs to balance inflationary pressures and the needs of the economy amid the credit crisis.

It is hoped the slowing economy will eventually help to bring down inflation – which is currently half a percentage point over the target of two per cent.

Julian Jessop, at Capital Economics, now predicts UK interest rates could fall to as low as 3.5 per cent.

He said: "Since last month’s decision, the dilemma facing the MPC has not got any easier to resolve. But on the whole, we think that the renewed problems in the money markets and the recent dire news on house prices will carry greater weight than inflation concerns at today's meeting.

"The UK economy facing similar economic imbalances to those unwinding with devastating effect in the US.

"The upshot is that interest rates will need to come down considerably further. We expect additional cuts to four per cent by the end of this year and then to 3.5 per cent in 2009."