Borrowers' joy as bank cuts interest rates for a third time

Published on Thursday 10 April 2008 13:24

HOMEOWNERS, borrowers and businesses were celebrating today after the Bank of England announced a reduction in interest rates for the third time since early December.

The bank's monetary policy committee made the decision to reduce rates by a quarter point to five per cent in the wake of a slowdown in consumer spending and the continuing effect of the credit crunch on the economy. Business leaders say they hope more cuts could be on the way.

The decision means the average homeowner stands to save around 16 on monthly mortgage bills.

But the credit crisis, which makes funding mortgages more expensive for banks, could mean the full reduction is not passed on to borrowers.

Previous rate cuts in December and February resulted in a varying reaction from lenders, with one-in-five failing to pass on the cut to borrowers and many only reducing their rates by 0.15 per cent.

Craig Esplin, a financial adviser with Edinburgh firm Fair Deal Mortgages, said that on an average mortgage of 100,000, householders will see their payments cut from a typical 719.86 on a standard variable rate mortgage over 25-years, to 703.97. "People going with a fixed rate mortgage aren't going to see anything happen," he warned. "Those on tracker rates will benefit the most from this.

"Those with a variable rate should also be quite happy with the decision today but you to have to remember it will be dependent on whether lenders decide to pass on the full cut.

"Today's decision should also give first-time buyers a little more confidence in getting on to the property market, although they will need a fairly large deposit for a mortgage."

Analysts said data showing falling housing prices drove the Bank of England's decision, despite inflationary pressures.

The reduction comes after the US Federal Reserve trimmed its core interest rates in a bid a stave off a recession. But the Bank of England's governor, Mervyn King, has already indicated that the UK will not be following America with dramatic rate drops.

The International Monetary Fund said yesterday it expected slower economic growth in the UK to reduce inflation, confirming further rate cuts.

Experts are pencilling in more cuts, with rates possibly hitting as low as 4.25 per cent by the end of the year.

Ron Hewitt, chief executive of Edinburgh's Chamber of Commerce, said: "We would say that this is welcome progress, but at the same time it is not the end of the story. Inflation, the hand on the tiller, has seen increasing food and fuel prices and the cost of raw materials worldwide has gone up.

"But it is a bold move by the monetary policy committee to reduce rates – one that will ease conditions on economic growth helping businesses and consumers. However, there is more to be done – and expect to see another quarter point off interest rates next month again."