Interest rates will fall to 5% by the middle of next year, economists and investors predicted yesterday, after the Bank of England made its first cut in official rates for two years in a bid to stem the fallout from the credit squeeze. Financial Times, Daily Telegraph, The Times, The Independent, The Guardian
The Bank cut its main interest rate by a quarter of a percentage point to 5.5%, as it expressed concerns that difficulties in securing credit had darkened the medium-term economic outlook in recent weeks. But even though official rates appeared on their way down, questions remained over whether lenders would seek to rebuild margins by failing to pass on the full benefit to borrowers at the same time as reducing many savings rates.
Although lenders Halifax and Nationwide dropped their variable-rate mortgages by a quarter point, mortgage brokers warned that many other banks and building societies might refuse to pass on lower rates to borrowers.
'Borrowers coming to the end of cheap rates may not necessarily find that all new deals are reduced by a quarter point,' said Melanie Bien, director at Savills Private Finance, the mortgage broker.
In a statement explaining its decision, the Bank’s monetary policy committee blamed deteriorating conditions in financial markets and 'a tightening in the supply of credit to households and businesses' that threatened to depress growth and allow inflation to fall too far below the official 2 per cent target.
Although the Bank was still worried about rising inflation, it judged that risks to the wider economy justified the easing of monetary policy.