Interest rate cut this week would help mortgage customers

06 October 2008 / by Rachael Stiles
The Bank of England's Monetary Policy Committee is expected to cut interest rates this week, which will offer some relief to homeowners who are struggling with soaring mortgage rates and a higher cost of living.

Most analysts expect the MPC to cut rates when it meets on Thursday, with the majority expecting a quarter point cut to 4.75 per cent.

Despite calls on the MPC to help hard-up homeowners as mortgage rates increased, the base rate has stood at five per cent since April because inflation has been running dangerously high, at twice the official target of two per cent.

In order to prevent a deep and prolonged recession in the UK, some analysts believe that rates will eventually need to fall to 3.5 per cent or lower – their lowest level for more than half a century.

Some of those who have been calling for a rate cut in recent months believe that the Chancellor Alistair Darling should break Treasury rules by stepping in and use his authority to tell the independent Bank of England that it must cut rates.

"We're on the cusp of a major economic disaster coming out of the financial disaster," said Liberal Democrat economic spokesman Vincent Cable. "A big cut is going to have to happen and the Chancellor of the Exchequer is going to have to clear the way in order for them to do it."

Events in the financial markets over the last week have changed economists' views on the future stability of the UK's economy. According to a Reuters poll, 49 out of 62 economists now expect a rate cut of at least a quarter point this week, compared to the 21 out of 66 which predicted it just a few days earlier.

Whereas soaring inflation has previously kept the MPC from cutting rates, and driven analysts not to expect one this year, it is now thought that inflation has lost its capacity to restrain making borrowing cheaper, as the economic situation deteriorates with tumbling share prices and a stalled property market.

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