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The Bank of England Plays Santa


The MPC: Monthly meetings to decide the base rate

On the 6th December the Bank of England finally bowed to pressure to cut interest rates by one quarter of a percent, taking the base rate down to 5.5%. The accompanying statement from the bank's Monetary Policy Committee (MPC) signalled its concerns about the continuing global credit squeeze; "Conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead" The move by the bank prompted analysts to predict a fall to 5% by the summer and, rather more boldly, 4.5% by 2009.

For homeowners, each quarter percent cut in the base interest rate will shave about £30 off the monthly cost of a £200,000 mortgage. The cut follows a number of reductions in profit forecasts by retailers (in reaction to reduced consumer spending) and a fall in house prices; the Halifax reported a 1.1% dip in house prices for the month of November. The bank had already indicated that a rate cut was likely next year via its Inflation Report released last month, but it was brought forward to help sentiment in financial markets and amongst households. The US Federal Reserve is widely expected to follow suit and reduce rates this week, but the pound fell to a two-month low against the dollar after the rate cut. This is in contrast to the renewed strength of the euro after the European Central Bank (ECB) elected to hold rates at 4%.

Although the bank's move was widely welcomed, the London stock market actually fell back slightly because some investors had expected a bigger cut. Alan Clark of BNP Paribas said: "Instead of just talking about it, the MPC has been brave enough to act pre-emptively." Whatever the speculation and permutations that surround these actions, Michael Coogan, the Director General of the Council of Mortgage Lenders summed it up by stating: "This will reduce the risk of payment shock for the 1.4 million borrowers coming off fixed rates in the next year."