Nationwide data shows that house prices have seen their biggest slump in 12 years, but Bank of England Governor Mervyn King says lending criteria is set to get even tighter, making buying a property even tougher – especially for risky borrowers.
Mortgage approvals are at their lowest level since early 2005, and yesterday, Mr King told MPs on the Treasury Select Committee that borrowing is set to get much harder for individuals and businesses as a result of the rolling credit crisis, which makes the decision about whether or not to cut the rate much harder.
"Recent economic news has been dominated by the continuing turmoil in global financial markets which has led to a tightening of credit conditions, particularly for the most risky borrowers, he said.
"In the UK, the consequences are difficult to assess and are likely to be evident first in the housing and commercial property markets. With borrowing more expensive, and less easily available, the personal saving rate is likely to rise, leading to slower growth of consumer spending."
A lower interest rate would obviously help borrowers, and it was originally thought there would be a cut interest rates next week, but now it seems much less likely as King warned that the months ahead will be 'rather uncomfortable', because the BoE is stuck between a rapidly slowing economy and an inflation threat thanks to rises oil and commodity prices.
"We are trying to balance the risks to inflation with the downside risk if activity slows sharply," he said. "The Committee’s current judgment is that the most likely outcome is for output growth to slow and inflation to rise, at least for a period.
The outlook is also highly uncertain which makes the task of navigating through the next few months far from straightforward."
The City has now put the odds of a cut at 50:50, though confidence is still high for at least three cuts in 2008.
© Fair Investment Company Ltd
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