Musings of a London Property Finder
The Bank of England has cut interest rates by 1.5 percentage points to 3%. Such a sharp reduction is practically unprecedented but members of the Bank of England’s Monetary Policy Committee have hinted on several occasions that a severe reduction in interest rates was likely. Some pundits have suggested that interest rates could fall to close to 0% by the end of 2009 in order to ease credit restrictions.
Those with tracker rate mortgages should see the benefits quickly and the government will continue to put pressure on lenders to pass on the cuts to consumers on other rates. Generally central banks refrain from lowering interest rates significantly because it tends to push up inflation as people can afford more, credit becomes less expensive and there is less incentive to save.
Consumer Price Index (CPI) Inflation rose to 5.2% in September, rising sharply from 2.2% since the beginning of the year. The rapid increase in inflation this year has largely been attributed to rising energy and food prices, however commodity prices have started to fall and oil prices are down by over 50% from their peak so inflation is expected to fall back sharply, as retail energy and food prices decline.
Given the difficult economic situation at present, a reduction in interest rates is expected to alleviate pressure on the consumer purse, but not to the extent of adding to inflation. The rate was decreased to assist the Bank of England achieve the CPI inflation target of 2%, set by the government in the medium term.
The government is keen to reinvigorate the housing market as quickly and painlessly as possible. Hopefully this move today will persuade investors and first time buyers to enter the market and get things moving again as yields increase and the margin between the cost of rent and a mortgage narrows. Keep reading the musings of a London Property Finder to keep abreast of mortgage news