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Beyond the base rate

4th September 2008 | back to article listings BACK    print this article PRINT

Today, as expected, the Bank of England's monetary policy committee (MPC) announced for the fifth month in a row that it is holding the base rate at five per cent. Whether the exact voting figures will be similar to those of last month will not be known until the minutes come out on September 17th, but in the meantime there are has been at least one commentator who expected that more than just David Blanchflower will have voted for a cut this time.

Such a prediction came from New Star Asset Management economist Simon Ward, who told City Wire that while there would be a hold, the additional support for a rate trimming would be the catalyst for change soon. He stated: "I'm expecting more members to vote for a cut and this may pave the way for an actual rate cut in October or November."

The expectation of an early cut has also been expressed today by the chief economic advisor to the Confederation of British Industry, Ian McCafferty.

Mr McCafferty stated that a hold was always on the cards today due to continued concerns over inflationary pressures.

"But as the autumn unfolds, the chances of a rate cut will increase, as the slowdown improves the inflation outlook for next year," he added.

All of this would be good news for property investors hoping to see more cuts in the cost of borrowing. Moreover, a template for how the Bank may justify a cut could have been provided by the Reserve Bank of Australia (RBA). While Britain has been waiting five months since the last cut, Australia had not seen a rate reduction for seven years until this week, when the trimming of 0.25 per cent to seven per cent took place.

RBA Glenn Stevens explained the reasoning while discussing an eerily familiar scenario - that of trying to find a balance between rising consumer prices index inflation and falling growth. However, having said that inflation will "remain relatively high in the short term", he added: "Looking further ahead, the outlook for demand suggests that inflation in both CPI and underlying terms is likely to decline over time, provided wages growth remains contained."

However soon it may be before a similar calculation prompts the MPC to drop the rate here, those who are buying property are still seeing mortgages come down. A study by price comparison website Moneyfacts has found that after the average two-year fixed-rate mortgage peaked at 7.08 per cent in July, the figure is now at 6.39 per cent. Significantly, it noted, it was last this low in July 2007 - the month before the Northern Rock crisis put the term "credit crunch" on everybody's lips.

Besides this, the site noted that in July last year, the base rate was 0.75 per cent higher than it is now. So the cost of mortgages is clearly not all about the base rate. For those hoping to see further falls in borrowing costs, this could be the best news of all.

This is a press release by Assetz also available at http://press.assetz.co.uk/articles/4362.html. Alternatively, please see our full press release archive.

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