Thrifty Loans

Stock markets around the world greeted the US Federal Reserve’s decision to cut its interest rates by 0.5% with glee this week. Share prices soared, and the queues to withdraw savings from Northern Rock disappeared after the UK government declared that it would ensure all savings accounts.

After the half-percent cut in the US, there is hope that the Bank of England’s Monetary Policy Committee (MPC) will follow suit with a base rate cut in October.

Things change so fast. Only a few weeks ago, the popular prediction was for interest rates to reach 6% in autumn, and the fervent hope was that they would not go any higher before the end of 2007.

The Bank of England wasn’t keen to lend a hand to the markets or Northern Rock – adopting a non-interventionist approach. Governor Mervyn King did not want to add fuel to inflation’s embers by pumping more money into the City, but has now had to do so twice – to the tune of £8.8bn – as well as offering assistance to Northern Rock. A further £10bn is in the offing.

Mr King’s counterparts in the US and Europe were more forthcoming with assistance, but he wished to avoid throwing good money after bad.

The US rate cut served to boost financial markets, and the same might result if Mr King were to cut rates in the UK. Will it happen and can UK mortgage holders expect a cut in their mortgage rates?

It does appear that the MPC is concerned. This month’s meeting minutes show concern for the effects of the US sub-prime mortgage collapse on the wider economy. With markets still unpredictable, consumer confidence at rock-bottom, and also with inflation at 1.8% –
below government target – an interest rate rise is inconceivable. What about a rate cut? There are some reasons against it: the housing market has been very buoyant for some time, and still needs cooling; output in the first half of 2007 has been strong. In America the Federal Reserve was keen to stave off a recession. The situation is not the same in the UK.

The best the UK can hope for is a quarter percent cut.

As for mortgage rates, don’t be surprised if UK lenders are not keen to pass on the full quarter percent to their borrowers.