Bank of England cuts interest rate by 0.25% - But will it work?

EXPERTS have warned of a looming recession and accused the Bank of England of failing to do enough to boost the flagging economy after it trimmed the base rate by only a quarter percentage point.

The move to a rate of 5 per cent was half the drop that some analysts had predicted, and was branded "long overdue" and "not nearly enough" by industry chiefs.

A leading Scottish economist warned it would take time to have an effect on the country's economy – and would not prevent a slowdown in the housing market.

Although some lenders said they would pass on the savings to mortgage-holders, others refused to commit. Meanwhile, Nationwide said it was putting up some of its fixed-rate deals – bad news for those looking to remortgage.

Those with the right bank could see their monthly payments on an average mortgage of £100,000 reduced by about £16 – a saving which consumer groups described as "a lifeline".

The quarter-point cut is the third since December and comes after reports that house prices fell by 2.5 per cent last month – the biggest monthly drop since the property crash of the early 1990s – and that consumer confidence and mortgage take-up were both at a critical low.

Julian King, of the National Homebuyers organisation, said the "timid" interest-rate cut was a "cruel snub" to thousands of British homeowners struggling to meet their mortgage payments. He accused the monetary policy committee of the Bank, which made the decision, of "fuzzy thinking".

He also said it had paid too much attention to the inter-bank lending rates instead of taking control of the situation.

Frank Blin, head of UK Regions at PricewaterhouseCoopers, also warned the Bank needed to do much more.

"The UK economy, like that in the US, has been riding high on a tide of easy money in recent years," he said. "But, since last summer, the global credit crunch has brought the party to an end and the effects are now being seen closer to home in the withdrawal of many UK mortgage deals, and the sharp drop in house prices in March, reported earlier this week by the Halifax.

"In this context, the Bank of England made the right decision to cut interest rates to 5 per cent, but more such action will be needed later this year if we are to avoid a recession."

And Stephen Robertson, the director-general of the British Retail Consortium, said that because changes take months to have an effect, further cuts were "needed sooner rather later to avoid a hard landing".

Economics professor David Bell, of Stirling University, said: "The rate cut will bring some benefit to the Scottish economy – but it will take some time to have an effect. It will not prevent a slowdown in the Scottish housing market, which is driven by the logjam in the credit market, rather than by the official Bank of England lending rate."

But the Scottish Council for Development and Industry's chief economist said the decision was good news for the housing market north of the Border, where confidence and investment had been "pretty robust".

Iain Duff said the cut would "help maintain positive sentiment and reinforce the housing market, and make sure that the Scottish economy comes in at around trend rate of growth this year". He expected more cuts.

Liz Cameron, chief executive of Scottish Chambers of Commerce, said the organisation hoped the cut would boost confidence and investment, and added that it would "come as some comfort" to Scottish firms facing rising transport and energy costs.

But the British Chambers of Commerce said the cut was "overdue" and called for a cut next month to 4.75 per cent.

The Bank of England is tasked with maintaining a 2 per cent inflation rate, but in February it rose to 2.5 per cent. In a statement yesterday, the Bank said inflation should fall back later this year and, balancing out the risks, a cut in interest rates was justified.

It noted that "credit conditions have tightened and the availability of credit appears to be worsening" and said its decision "should help to keep domestic inflationary pressures in check in the medium term".

Mortgage lenders had been accused of "profiteering" by failing to pass on previous rate cuts to borrowers, but even if they cut their rates now, experts say it is doubtful that new borrowers will see much of the benefit.

Brian Murphy, head of lending at the Mortgage Advice Bureau, said: "As with previous rate cuts, the main winners will be those on existing tracker deals."

Ann Robinson, of uSwitch. com, said slashing the interest rate was good news for borrowers but just "a drop in the ocean" for "the average consumer's monthly budget".

STEPHEN ROBERTSON

DIRECTOR GENERAL OF THE BRITISH RETAIL CONSORTIUM

With consumer confidence at its lowest level for 15 years, customers are reining in their spending and every prudent retailer is looking at cost-cutting more seriously than for some time.

Retailers are absorbing many of the input cost increases, and intense retail competition means that non-food prices are actually falling, while food-price inflation is slowing.

With interest-rate changes taking months to have any effect, further rate cuts are needed sooner rather later to avoid a hard landing.

TREVOR WILLIAMS

CHIEF ECONOMIST AT LLOYDS TSB CORPORATE MARKETS

If the MPC had left rates on hold, it would have left the economy exposed to a slowdown. But by cutting rates, it has left inflation free to rise even further. It was probably the stream of economic data published in recent days that tipped the balance in favour of a cut. The Bank's own report on credit conditions was anything but upbeat. There are some who believe rates could fall further still, but the likelihood is today's cut will be the last we will see this year unless the economic situation deteriorates further.

STEPHEN ROBERTSON

DIRECTOR GENERAL OF THE BRITISH RETAIL CONSORTIUM

With consumer confidence at its lowest level for 15 years, customers are reining in their spending and every prudent retailer is looking at cost-cutting more seriously than for some time.

Retailers are absorbing many of the input cost increases, and intense retail competition means that non-food prices are actually falling, while food price inflation is slowing.

With interest-rate changes taking months to have any effect, further rate cuts are needed sooner rather later to avoid a hard landing.

ROGER BOOTLE

ECONOMIC ADVISER TO FINANCIAL SERVICES FIRM DELOITTE

I think that the continued problems in the financial markets and the associated tightening of credit conditions will mean today's cut is another step towards rates eventually falling to 3.5 per cent.

It is becoming increasingly likely that house prices will fall both this year and next. And if the housing market continues to slow at anything like current rates, it is surely only a matter of time before consumers decide to batten down the hatches.

Interest rates are probably still acting as a brake on economic activity.

PETER WILLIAMS

EXECUTIVE DIRECTOR OF THE INTERMEDIARY MORTGAGE LENDERS ASSOCIATION

This is welcome, though a half-point cut would have been even more welcome. The Bank has to regain control and the quarter-point reduction is a good start. I think we will need further reductions in future months to help bring down money-market rates and bolster flagging consumer confidence.

However, rate cuts are now only part of the urgent action needed from the Bank.

The other key step is to take forward its money-market operations and move to restore liquidity in the UK capital market.

MARTIN ELLIS

CHIEF ECONOMIST AT THE HALIFAX, BRITAIN'S BIGGEST MORTGAGE LENDER

Our view is there will be further interest-rate cuts. Clearly, the economy is slowing down and growth will be below long-term trend this year. But I think the Bank of England has taken the right approach to do it in steps. Clearly, the Monetary Policy Committee is still concerned about inflation. They have a balancing act to do.

There will be some relief for existing mortgage-holders, who can probably expect some reduction in payments.

IAIN DUFF

CHIEF ECONOMIST AT THE SCOTTISH COUNCIL FOR DEVELOPMENT AND INDUSTRY

Another cut in rates should help maintain positive sentiment and reinforce the housing market, and make sure that the Scottish economy comes in at around trend rate of growth this year. Falling interest rates should contribute to further weakening of the pound against the euro, which is good news for Scotland's exporters and our tourism industry. Given the poor data for the UK, it seems likely that this will be the first in a number of rate cuts this year.

HOWARD ARCHER

ECONOMIST AT CITY ECONOMICS CONSULTANCY GLOBAL INSIGHT

I'm not sure whether the 0.25 per cent cut will have much effect. It's doubtful how much of it will be passed on by the mortgage lenders, even if some will. Having said that, hopes of a half-point cut were always pretty unrealistic, given the elevated inflation figures and money-market rates due to the credit crunch. There might be some help to confidence, however, in that it shows the Bank of England is prepared to help out. We think further cuts are coming and we will be down to 4.25 per cent by the year end.

BLAIR STEWART

HEAD OF RESIDENTIAL SALES FOR ESTATE AGENT STRUTT & PARKER

This is a welcome nod in the right direction in helping to restore consumer confidence in the UK property market.

The cut will help first-time buyers and those looking for homes up to the £500,000 mark who are more susceptible to interest-rate fluctuations on their mortgages. Although there will be no real impact for those on fixed-rate mortgages, those on tracker mortgages linked to the Bank of England rate will feel the benefit.

ED MONAGHAN

MANAGING DIRECTOR OF HOUSEBUILDERS MACTAGGART & MICKEL

The housebuilding industry is undeniably faced with challenges, but long-term projections are strong.

Despite the stagnant market, Scottish house inflation is well above the UK average.

The crunch may have had a limited effect on the marketplace so far but rates should be kept low to ensure credit-worthy buyers maintain a buoyant market.

Sluggish growth of annual earnings coupled with rising living costs has had a negative effect on consumer confidence. Homeowners and prospective buyers have been tightening the purse-strings while banks are increasingly unwilling to lend. A rate cut should help to free up the system and go some way to restoring consumer trust.

DAVID BELL

PROFESSOR OF ECONOMICS AT STIRLING UNIVERSITY

The rate cut will bring some benefit to the Scottish economy, but will take time to have an effect. It will not prevent a slowdown in the Scottish housing market, which is driven by the logjam in the credit market, rather than by the official Bank of England lending rate. Banks are far less willing to take risks, which has dramatically reduced their willingness to lend. This will have an adverse effect on first-time buyers.

The interest-rate cut will benefit Scotland's export industries, because our low interest rates compared with continental Europe will keep the pound weak relative to the euro.

CLEM CHAMBERS

CHIEF EXECUTIVE OF ADVFN, STOCKS AND SHARES WEBSITE

This is nowhere near enough. Not even close. The European Central Bank, for instance, is seen as slow and even backward on monetary policy and yet their rates are down at 4 per cent.

It's not going to stop the UK skidding into a ditch, if not outright recession.

And it could be a harsh and long recession.

LIZ CAMERON

CHIEF EXECUTIVE OF SCOTTISH CHAMBERS OF COMMERCE

Scottish businesses will welcome this further cut in interest rates, which we hope will bolster confidence and investment amid fears that our national economic growth rate may be slower than expected over the next year or so.

Whilst the Bank of England must continue to do all it can to ward off the threat of inflation,

we welcome the continued downward trend of base rates, and look forward to further cuts before the end of this year.