Building societies say no to another interest rate cut

04 February 2009 / by Rebecca Sargent
Ahead of the Bank of England's latest interest rate meeting on Thursday, the Building Societies Association (BSA) is urging the Monetary Policy Committee (MPC) to refrain from further interest rate cuts.

Since January 2008, the Bank base rate has fallen from 5.5 per cent to 1.5 per cent, with the majority of the cuts happening during the last four months. Some experts are expecting a further cut of 0.5 per cent to be announced on Thursday, but the BSA is warning against such action.

According to the BSA, further rate cuts will damage savers further, some of which have seen incomes from their savings accounts fall by almost 75 per cent since 2007.

Commenting, Adrian Coles, director general of the BSA said: "This drop in income is particularly serious for pensioners who have saved all their lives and now face a sharp reduction in their income and living standards.

"For pensioners dependant upon their interest income from their savings rather than their pension, prices would have to fall by an unimaginable 75 per cent for them to maintain their living standards."

When it comes to the impact of base rate on mortgages, the BSA has found that people are more concerned with securing mortgage finance than with affording the monthly payments.

Mr Coles added that "mortgage, availability, rather than the cost of mortgages, has become a more pressing issue over the last few months. This suggests that what is important to potential borrowers is maintaining the flow of mortgage funds to the market rather than reducing interest rates further."

Speaking of the importance of keeping savers happy, Mr Coles said: "We need to ensure that those with at least some capacity to supply funds for mortgage lending – personal savers – are encouraged to do just that, and that requires that the MPC refrain from making further cuts to the Bank Rate at least until the impact of recent reductions becomes clearer."

Nevertheless, city analysts who often dominate the mood when it comes to the base rate decision are predicting a cut of 0.5 per cent with further cuts expected this year. Commenting, Henk Potts, equity strategist at Barclays Stockbrokers said:

"We anticipate that the MPC will cut rates by 0.5 per cent to one per cent this week. The UK economy contracted by 1.5 per cent in Q4 2008 – its weakest performance since 1980.

"The threat of inflation has now turned to the risk of deflation due to the sharp drop in commodity prices, the temporary cut in VAT and weakness in consumer demand.

"We now expect the Bank of England to cut rates close to zero by mid-year."

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