Bank cuts interest rates amid falling house prices
The Bank of England today voted to cut interest rates amid increasing reports of an economic downturn.
The Bank’s monetary policy committee (MPC) voted to reduce interest rates by a quarter of a percentage point to 5.5 per cent.
Following the decision, Lib Dem economic spokesman Vince Cable said it was “obvious” the Bank would order a cut, despite many commentators reluctant to rule out a hold.
Mr Cable said panic in the city, reduced consumer confidence and the credit crunch had made an interest rate cut likely.
The British Chamber of Commerce welcomed the MPC’s decision and praised its “commendable flexibility”.
However, it warned a further cut may be necessary in the new year if the economic outlook does not improve.
Today’s cut will save someone with a £100,000 mortgage an average of £15 to £20 a month, although it remains unclear whether all lenders will pass on the savings.
The Royal Institution of Chartered Surveyors’ (Rics) chief economist Simon Rubinson nevertheless predicted it would provide much-needed relief for homeowners due to refinance their mortgages.
Mr Rubinson said: Higher money market rates resulting from the credit crunch threatened to lift the monthly outgoings for many of these borrowers which in turn could further crimp consumer spending during the course of 2008.
“Our support for the move is based on the recent run of disappointing economic data which extends way beyond the housing market. While it would be wrong to ignore the inflation risk, current wage settlements provide little evidence of any spill-over from the sharp jump in food and oil prices.”
Responding to today’s cut, Mr Cable said it was time for house price inflation to be incorporated into the consumer price index (CPI).
Currently, the MPC is meant to ignore the property market when setting interest rates and act on the mandate to maintain CPI inflation at two per cent.
Economists warn this has kept interest rates artificially low throughout the house price bubble, enabling more borrowing and sustained house price growth.
Mr Cable said: “The problem still remains that the Bank cannot take account of inflation and deflation in asset markets when making interest rate decisions.
“House price inflation should be incorporated into the CPI.”
Mervyn King, governor of the Bank of England, has said he finds it surprising house price inflation is not included in the bank’s decision making process.
The CPI replaced the retail price index, which did include house prices, as the official measure for the MPC.
