Interest rates will be cut, say City economists

04 February 2008 / by Verity G
The Bank of England is poised to cut interest rates by 0.25 points at the end of the Monetary Policy Committee meeting due to be held on Wednesday and Thursday of this week, according to a survey published over the weekend.

Following a study of 60 economists conducted by Reuters, the overwhelming response was that rates will be cut from 5.50 to 5.25 percentage points.

In contrast to last week's dramatic slashing of interest rates by the US Federal Reserve, the Bank of England is expected to favour smaller, incremental adjustments. Speaking to reporters for the Independent, Andrew Smith, Chief Economist at KPMG comments:

"A quarter-point rate cut on Thursday looks pretty much a done deal in the face of tightening credit conditions. Further rate cuts are on the cards – but not until more concrete evidence of a slowdown emerges."

However, while many are preparing to ease their belts a little at the prospect of a rate cut, Britain's biggest lenders have increased the cost of their tracker mortgages by up to 0.45 percentage points in the past fortnight alone – this means that new borrowers will get little or no benefit from the Bank of England's expected quarter-point cut in Bank rate.

Now hundreds of thousands of borrowers who remortgaged with the ubiquitous cheap tracker deals, which were popular two years ago, are facing hikes in their mortgage repayments of up to £75 a month.

According to figures from financial adviser John Charcol, raising trackers in this way will see banks and building societies cream off around £25 million. However, if the 0.25 point cut is made, the trackers will come down again – but only to the rate they were at before the cut.

The MPC has a difficult job at hand - after staving off a cut last month following the quarter point cut in December, pressure is on to see an improvement in conditions for homeowners, consumers and businesses alike.

Inflation from steepening energy and food prices, coupled with the depreciating pound, has to be balanced against fresh evidence of a weakening economy and the continuing effects of the credit crunch.

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