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Shock UK rate cut may not go far enough for consumers
Thu, 6th Nov 2008 16:52
By Peter Griffiths
LONDON, Nov 6 (Reuters) - The Bank of England's decision to cut interest rates to their lowest level in more than 50 years surprised markets, but may not be enough to reassure hard-pressed households as the economy slides towards recession.
With unemployment rising, house prices falling and inflation still more than double the bank's target, there is no guarantee that Thursday's dramatic 150 basis point cut to 3 percent is enough on its own to breathe life into Britain's ailing economy.
'Our feeling is that the Bank of England still has a lot more to do,' said Vicky Redwood, UK economist at Capital Economics. 'I think interest rates will eventually fall to 1 percent or even lower by the middle of next year.'
The looming recession -- the first since the early 1990s -- will also be more painful if banks fail to pass on rate cuts to households through cheaper home loans, commentators said.
Lenders have warned they may not be able to pass on cuts fully because of the crippling effects of the credit crunch which has raised the cost of borrowing for banks.
Lloyds TSB -- which is benefiting from the government's rescue package -- said on Thursday it would reduce its standard variable mortgage rate to 5 percent from 6.5 percent.
But, despite exhortations from the government, many lenders held fire on their variable rates, waiting to see if there would be any easing in money market conditions.
People in London's financial district said they were worried they might not benefit.
'A lot of people are on fixed rate mortgages so it's not going to have an immediate effect but I think it restores confidence knowing that there will be some decent deals out there again,' said Maria Mott, 38, who works for JP Morgan.
CREDIT CRUNCH
The Council of Mortgage Lenders said half of all customers would not see any benefit from the cut because they took out fixed-rate loans.
CML Director General Michael Coogan stressed that mortgage rates are based on the cost of lending between banks -- which has been unusually elevated throughout the credit crunch -- rather than the central bank's main rate.
'Their cost of funds is linked to the interbank rate, not the base rate, and we'll need to see what happens to that in the next few days,' he said.
If the 1.5 percent rate cut is passed on in full, it would cut the monthly payment on a 250,000 pounds ($397,300) mortgage to by 225 pounds to 1,413 pounds, the CML added.
The credit crunch has forced many banks to restrict lending, choking the housing market. Latest figures from the Halifax, Britain's
biggest lender, brought more gloom in a country where two-thirds of households own their property.
Halifax said prices fell at their sharpest rate in at least 25 years in October, having trebled in the last decade.
And the housing market and mortgage costs are just part of the headache for consumers.
'The rate cut will help us mortgage-wise, but the money saved will go on the extra costs of fuel and food,' said healthcare support worker Jacqueline Penny, 42, in the Scottish town of Glenrothes, where Prime Minister Gordon Brown's Labour Party faces a by-election test on Thursday.
(Additional reporting by Kylie MacLellan and Avril Ormsby; Editing by Toby Chopra) ($1=.6292 Pound) Keywords: BRITTAIN BANK/CONSUMERS
(peter.griffiths@reuters.com; +44 207 542 6472; Reuters Messaging: peter.griffiths.reuters.com@reuters.net)
COPYRIGHT
Copyright Thomson Reuters 2008. All rights reserved.
The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
LONDON, Nov 6 (Reuters) - The Bank of England's decision to cut interest rates to their lowest level in more than 50 years surprised markets, but may not be enough to reassure hard-pressed households as the economy slides towards recession.
With unemployment rising, house prices falling and inflation still more than double the bank's target, there is no guarantee that Thursday's dramatic 150 basis point cut to 3 percent is enough on its own to breathe life into Britain's ailing economy.
'Our feeling is that the Bank of England still has a lot more to do,' said Vicky Redwood, UK economist at Capital Economics. 'I think interest rates will eventually fall to 1 percent or even lower by the middle of next year.'
The looming recession -- the first since the early 1990s -- will also be more painful if banks fail to pass on rate cuts to households through cheaper home loans, commentators said.
Lenders have warned they may not be able to pass on cuts fully because of the crippling effects of the credit crunch which has raised the cost of borrowing for banks.
Lloyds TSB -- which is benefiting from the government's rescue package -- said on Thursday it would reduce its standard variable mortgage rate to 5 percent from 6.5 percent.
But, despite exhortations from the government, many lenders held fire on their variable rates, waiting to see if there would be any easing in money market conditions.
People in London's financial district said they were worried they might not benefit.
'A lot of people are on fixed rate mortgages so it's not going to have an immediate effect but I think it restores confidence knowing that there will be some decent deals out there again,' said Maria Mott, 38, who works for JP Morgan.
CREDIT CRUNCH
The Council of Mortgage Lenders said half of all customers would not see any benefit from the cut because they took out fixed-rate loans.
CML Director General Michael Coogan stressed that mortgage rates are based on the cost of lending between banks -- which has been unusually elevated throughout the credit crunch -- rather than the central bank's main rate.
'Their cost of funds is linked to the interbank rate, not the base rate, and we'll need to see what happens to that in the next few days,' he said.
If the 1.5 percent rate cut is passed on in full, it would cut the monthly payment on a 250,000 pounds ($397,300) mortgage to by 225 pounds to 1,413 pounds, the CML added.
The credit crunch has forced many banks to restrict lending, choking the housing market. Latest figures from the Halifax, Britain's
Halifax said prices fell at their sharpest rate in at least 25 years in October, having trebled in the last decade.
And the housing market and mortgage costs are just part of the headache for consumers.
'The rate cut will help us mortgage-wise, but the money saved will go on the extra costs of fuel and food,' said healthcare support worker Jacqueline Penny, 42, in the Scottish town of Glenrothes, where Prime Minister Gordon Brown's Labour Party faces a by-election test on Thursday.
(Additional reporting by Kylie MacLellan and Avril Ormsby; Editing by Toby Chopra) ($1=.6292 Pound) Keywords: BRITTAIN BANK/CONSUMERS
(peter.griffiths@reuters.com; +44 207 542 6472; Reuters Messaging: peter.griffiths.reuters.com@reuters.net)
COPYRIGHT
Copyright Thomson Reuters 2008. All rights reserved.
The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
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