Interest rate cut for first time in two years

Source: Exec Digital UK

Date :06/12/2007 15:10:28

Good news for UK home owners as the Bank of England announced a cut in its key interest rate by a quarter percentage point to 5.5 percent today after fears of a slowing UK economy.

Economists had expected the decision to be a close call, as the bank weighed up rising inflation against further evidence that Britain's decade-long housing boom is grinding to a halt and consumer confidence is deteriorating.

"Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow," the bank said in comments released with its decision.

Just a few months ago, most economists had expected the next move by the Bank of England to be a rise in rates to 6 percent from 5.75 percent to counter strong inflation and close off a series of rate hikes over the year to July.

However, the U.S. subprime mortgage market collapse and the subsequent worldwide credit squeeze in the late summer has hit Britain hard.

Bank of England Governor Mervyn King acknowledged earlier this month that tighter credit conditions may curb household demand, a sentiment reinforced on Thursday.

"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 bank said.

Mortgage lender Halifax revealed Wednesday that house prices across the country fell 1.1 percent in November, bringing house price growth for the year to 6.3 percent, down from 8.9 percent in October. It was the first time since 1995 that the lender had reported price drops for three consecutive months.

The Nationwide Building Society's index of consumer confidence, also released Wednesday, dropped 12 points to 86, the biggest decline since it was introduced in May 2004, as faster inflation erodes households' purchasing power.

Those rising consumer prices have complicated the bank's decision. Inflation rose 2.1 percent at an annualized rate in October, putting the measure above the government's 2 percent target.

The bank will publish the full minutes of this month's two-day rate setting meeting on Dec. 19, revealing details on the vote.

December 6, 2007