Bank Cuts Base Rate To 5.5%

The Bank of England has cut the base rate to 5.5%. This will be greeted by a huge sigh of relief from everyone from home owners to business owners.

The Monetary Policy Committee, who set the rate, probably came to the conclusion that leaving the rate unchanged would in the end have caused more harm than good. Some of the hawks in the MPC may feel that their hand has been forced as there has been a huge amount of hype over the interest rate in the past few days.

In what was one of the most awaited announcements, the Bank cut the rate by a quarter of a percent from 5.75%, down to the level last seen in June. MPC members had to take into account the risk to the economy that would have been posed by leaving the rate alone. Their decision means that their fears for the economy outweighed their current concerns for inflation, which currently stands at 2.1% and is widely forecast to go higher in the next couple of months, with food and oil prices on the rise.

Data this week showed that house prices were down, according to the Halifax and consumer confidence has plummeted. Although in themselves the house price figures would not concern the MPC, it is what they say about the state of the economy that would trouble them.

A cut in interest rates may help boost consumer spending in the crucial period for retailers – the run-up to Christmas. People who will benefit immediately are those with mortgages that are tied to the base rate, i.e. tracker or discounted mortgages. Those on fixed rates will see no change to their monthly repayments – and most mortgages are fixed these days. It might bring some relief to those who will looking to remortgage next year when they come off cheap fixed rate deals – the pain may not be as great now.

It is unlikely that mortgage lenders will pass on the cut in full where they don’t have too, but savers may take the full brunt of the 0.25% cut. Some savings houses were already cutting rates.

The cut will be seen as more good news for the City which rose strongly on Wednesday in anticipation of the cut, but the pound suffered against the dollar and may continue to do so