Assetz® News - Not a day too soon?

Not a day too soon?

8th October 2008 |

Today was always likely to be an important day in the fortunes of the UK property market, as the government announced what it hopes will be sufficiently radical and decisive action to bolster the banking sector and help kick start a recovery. Little did most people know that this would be only half the story.

In the morning, chancellor Alistair Darling announced the government's package: the provision of £50 billion of capital to the leading banks and building societies in return for the government taking stakes in them. In addition to this, there would be a £200 billion liquidity facility, four times the amount the Bank of England announced when it launched its Special Liquidity Scheme in April. All this, it is hoped, will safeguard the future of these institutions, encourage them to lend more to each other and raise the level of liquidity required to ensure they can ultimately lend more to consumers. This, of course, is what property buyers are looking for.

Commenting on the £200 billion liquidity package, chief executive of money brokers Tullett Prebon Terry Smith told the BBC: "They've [the banks and building societies] got additional capital now if they want it, they've got an unlimited source of liquidity."

All this would have made the day significant enough, but at lunchtime came the surprise announcement that the Bank of England had made its decision on interest rates a day early. Not only that, but the monetary policy committee (MPC) had joined forces with the US Federal Reserve, European Central Bank and the central banks of Switzerland, Sweden and Canada in a concerted action by which all would lower their base lending rates by 0.5 per cent. It was the first time the MPC had cut the base rate by more than 0.25 per cent since November 2001.

Explaining its decision, the MPC said that recent events had altered the equation in terms of the long term potential for inflation to either soar or plummet. Now, it said, the balance of the risk had moved "decisively to the downside", warranting the reduction in the base rate to 4.5 per cent. Those on tracker mortgages will automatically benefit. It now remains to be seen how many banks lower their other rates.

The combination of actions by governments and central banks across the world shows they all mean business, if nothing else. The MPC said it was pleased to see the government taking the action it had, as a rate cut alone could not solve all the financial market problems.

Also pleased was Council of Mortgage Lenders director general Michael Coogan. He stated: "Today's package of bank funding and capital measures is further strengthened by this rate cut. Not only are the tripartite authorities now pulling together decisively to address domestic confidence, but international central bankers are also collaborating much more effectively on their position."

He concluded: "All this decisive action augurs well for an improving market situation looking ahead, even though no one is pretending the tough times are over yet."

While the last statement may undoubtedly be true, it could just be that today may have marked the decisive turning point in the financial crisis, benefiting the property market both by the direct consequences of the rate cut and through the broader benefits of an economy which, it is to be hoped, will see a shorter and shallower downturn than may otherwise have been on the cards.