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Credit crunch time for many as interest rate cut appears unlikely

05 November 2007
Those anticipating a cut in interest rates similar to the recent slash in the US are likely to be disappointed on November 8. Economists are predicting that the Bank of England will hold rates at 5.75 per cent for the fourth consecutive month.

“Recent comments by Kate Barker and Charles Bean suggest to us that they are not inclined to cut interest rates yet,” says Global Insight’s Howard Archer.

This could be regarded in a positive light; the financial crisis threatening to destroy the UK economy does not appear to have struck as yet. Moreover, retail sales have been fairly resilient and consumer confidence appears to be more or less intact.

According to Nationwide, house prices rose in September and Alliance and Leicester reported that savings have been increasing at a much faster rate than borrowings in recent years.

However, those paying loans and mortgages may not be too thrilled if rates remain static. Those hoping that the US sub-prime debacle and the run on Northern Rock will lead to a cut may have to wait until next month, or even beyond, for some relief.

And owners of new-build city centre flats could be among the worst affected. Reports indicate that there is an abundance of apartments and a shortage of tenants and that, although interest rates have risen five times since August 2006, rental prices have not followed suit. Many UK landlords and homeowners will be hoping for a rate slash.

Mr Archer points out that: “Significant headwinds: the credit crunch, strong pound, marked overall rise in interest rates since August 2006, elevated oil prices, and slowing growth in key export markets” could lead to a reduction.

“However, an early interest rate cut risks fuelling inflation if growth proves to be resilient over the coming months. We lean towards the view that the Bank of England will remain in ‘wait and see’ mode on Thursday,” he concludes.

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