Interest Rates Cut

The Bank of England cut interest rates yesterday for the first time since April. The committee voted to reduce the rate by half a per cent to 4.5%. Economists hope the rate cut will stimulate the housing market, ease global monetary conditions and inject some stability into the stock market.

A statement released by the BoE stated that:

“In the United Kingdom, CPI inflation rose to 4.7% in August, reflecting increases in food and energy prices. Inflation is likely to rise further to above 5% in the next month or two, in large part as the full effects of already announced increases in the price of domestic energy are felt. But inflation should then drop back, as the contribution from retail energy prices wanes and the margin of spare capacity in the economy increases. Pay growth has so far remained subdued and commodity price pressures have eased, with oil prices down substantially from their mid-summer peak.

Conditions in international credit and money markets have deteriorated very markedly. Many markets are closed. In the United Kingdom, the supply of credit to households and businesses is clearly tightening further as banks seek to adjust their balance sheets. The Committee noted that cuts in official interest rates could not be expected to resolve the current problems in financial markets and that a significant increase in the capital of the banking sector would be required. The Committee therefore welcomed this morning’s announcement of a Government programme to recapitalise the major UK banks”.

The news of the rate cut was followed by new figures released by Halifax this morning, which showed that house prices fell by the smallest amount in seven months during September. Prices fell by 1.3% last month, bringing the average house price in the UK down to £172,108. This brings the total drop in house prices during the three month period between July – September to 5.2%, with average prices now reflecting prices last seen in January 2006*.

Many experts are predicting that housing prices have not got much further to fall, expecting the market to ‘bottom out’ in the next few months.

*Timesonline.co.uk data.

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