Bank of England Reduces Bank Rate by 0.25 Percentage Points to 5.5%

News Release

The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.5%.

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. Forward-looking surveys of households and businesses suggest spending is moderating, broadly in line with the projections contained in the November Inflation Report. But 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.

CPI inflation was 2.1% in October. Higher energy and food prices are expected to keep inflation above the target in the short term. Although upside risks to inflation remain, which the Committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term.

Against that background, the Committee judged that a decrease in Bank Rate of 0.25 percentage points to 5.5% was necessary to meet the 2% target for CPI inflation in the medium term.

London house prices fall 0.6% in October

According to the Land Registry’s latest house price index, London house prices have fallen, compared with a relatively flat market in England and Wales. October’s Land Registry House Price Index showed house prices in London fell by 0.6%, following a 1.3% gain in September, while the overall English and Welsh market demonstrated a slight increase of 0.1%, well below the 0.7% average monthly increase recorded over the last 12 months. The average house price for England and Wales is now £184,346, while in London the figure stands at £351,039. At the same time, annual house price inflation also eased during October, dropping to 8.1% down from 8.7% in September.

A third of mortgage holders could be in trouble

A study by consumer research group Mintel has shown that up to one in three, or 5.5 million mortgage holders in Britain could face serious financial difficulties as a result of the US sub prime crisis, and the tougher lending climate it has created. “The focus over the last few months has very much been on sub prime borrowers, but they are only the tip of the iceberg,” said Toby Clark, a senior finance analyst at Mintel. The group claims that 9% of British mortgage holders were classed as sub prime, while a further 24% were non-standard and relatively high risk because they had irregular incomes.”In today’s more conservative lending climate, the unconventional financial situation of these homeowners means that they will now face higher repayments and increased lenders’ fees when remortgaging or moving house,” Mintel said.

Two thirds go to friends and family for advice

Two-thirds of people in Britain are using their friends and family to recommend financial advisers, claims Birmingham Midshires. According to its research, when seeking advice with finance, 63% use personal recommendations, 44% look for Government regulation and 38% go by the years of experience the adviser has. Tim Hague, managing director of mortgages at Birmingham Midshires, claimed that using an independent financial adviser is vital to navigate through the hundreds of products on the market. “While it is good to get a steer from friends or family on where to go for financial advice, their financial needs may have been very different,” he explained. According to Mr Hague, seeking a specialist IFA will be beneficial for a consumer as they are more qualified to meet their exact needs.

Mortgage arrangement fees double in two years

Latest Moneyfacts research has revealed that the average mortgage arrangement fee has almost doubled during the last two years. Figures from November 2005 showed an average flat arrangement fee at £441. Today it stands at £827, with a massive 9% of prime deals now charging a percentage fee. “Thousands of borrowers coming off a two year fixed rate will be bracing themselves for higher interest charges, with the best deals over 1% higher than in 2005. But they will also need to prepare themselves to pay much higher fees, with the average fee rising 100%.” The use of percentage fees has become more common, with 9% of all prime mortgage deals charging a percentage fee ranging between 0.2% and 3.5%. “Unfortunately too many borrowers still focus their initial attention on getting the best rate, without taking full consideration of the true cost of the deal,”

JC Flowers tries to derail Virgin bid for Rock

JC Flowers tries to derail Virgin bid for Rock

JC Flowers, the US private equity firm, made a last-ditch bid yesterday to wreck Sir Richard Branson’s takeover of Northern Rock after it signalled possible increased payouts for shareholders as part of a revised offer. The move is likely to heighten tensions between the three main bidders for the bank and the Treasury, which is thought to be keen on a quick sale to close the door on the politically and financially embarrassing episode. Sources close to Flowers said attempts to sit down with Treasury officials this week had proved fruitless, despite promises from the government that all takeover proposals would be examined. The Treasury denied last night that it was reluctant to engage in talks with the Flowers team. “We stand ready to have discussions with any bidder that meets the principles we set out,” it said. Flowers, which was founded by the former Goldman Sachs partner Chris Flowers, has threatened to walk away from the deal unless ministers get back around the negotiating table within the next few days.
[The Guardian page 42 - 1.12.07.]

Bank deputy hints at interest rate cut

Interest rates could be cut next month to counter the turmoil affecting markets, a Bank of England official said yesterday. Deputy Governor Rachel Lomax said she feared the financial crisis could trigger a fall in property prices. Despite voting for rates to remain at 5.75 per cent earlier this month, she said she would be willing to cut rates to combat the “credit crunch” caused by the collapse of the American mortgage market. Banks have been “hoarding” money rather than lending because they face major losses on portfolios of defaulting US mortgages, she said.
[Daily Mail page 8 - 23.11.07. Also reported in The Daily Telegraph page B5.]