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Interest rate cut: Experts react
Experts react to the Bank of England's decision to cut
interest rates to 3 per cent
By Myra Butterworth, Personal Finance Correspondent
Last Updated: 9:46PM GMT 06 Nov 2008
Shadow Chancellor, George Osborne said: "This is a shot in the arm for the economy,
but it shows how sick the patient is.
"As we have argued, reducing interest rates is the best way to fight the recession and so
we welcome the Bank of England's decision. But the size of the cut means that the Bank
recognises the UK economy is in serious trouble.
"Now we need the cut to be passed on to homeowners and small businesses. I would hope
that banks that see themselves in strong and stable positions can pass on the cut in full.
"The recapitalisation plan was not just to rescue the banks but to rescue the economy and
the millions of families who depend on it."
James Knightley, an ING economist, expects more aggressive rate cuts, with the Bank's
base rate down to 2.5 per cent in December and 2 per cent in January.
Howard Archer, an economist at Global Insight, said it was possible interest rates could
come down to 1.5 per cent by mid-2009.
He said: "This reflects our belief that the economy will contract up to, and including, the
third quarter of 2009 before stabilising. We expect GDP to contract by 1.5 per cent
overall in 2009."
Mr Archer said today's larger than expected cut to 3 per cent was justified given the UK
economy was now in "grave danger of suffering a prolonged, deep recession".
"Furthermore, mounting evidence that underlying inflationary pressures are now
moderating significantly gave the Bank scope for aggressive action," he added.
Peter Damesick, head of UK research at CBRE, said: "The size of the reduction reflects
three things. First, the MPC had been seriously behind the curve in responding to the
gathering pace of the UK economic downturn. Second, the Committee is now very
concerned about the likely depth of the downturn. And third, with the credit markets still
frozen, it shows that the Committee felt a big cut was needed to achieve the required
monetary easing."
Simon Ward, economist at fund managers New Star, said: "Drastic action was warranted
but there is a risk of exhausting interest rate ammunition too soon. The cut will have
limited impact unless the financial system starts to function normally. The MPC is hoping
to shock money and credit markets back to life but the Fed's rate-slashing failed to avert a
US credit crunch. UK policy-makers may need to consider additional steps to ensure the
flow of credit to firms and households, such as an expansion of the small firms loan
guarantee scheme."
Paul Niven, head of asset allocation at F&C Asset Management, said: "Where rates
finally settle before the low in this cycle remains to be seen but further material cuts will
be forthcoming in the UK, with expectations for 2 per cent or lower now becoming
entrenched in market expectations."
Louise Cuming head of mortgages at moneysupermarket.com, said: "Today's move
couldn't have come at a better time for many homeowners, and is a far greater step in the
right direction than many of us had expected.
"But a cut in the base rate, even a pretty gargantuan one as we've seen today, won't
necessarily encourage lenders to start lending again, and they may well take a much more
conservative approach while building up funds. Until lenders begin to lend and not hoard
their cash in their coffers, the problem remains the same. Lending criteria won't change
just because the Bank of England has finally woken up to the prospect of the R word."
Darren Cook, mortgage expert at Moneyfacts.co.uk, said: "Congratulations must go out
to Lloyd TSB and Cheltenham & Gloucester for making a bold statement earlier today,
pledging that they will cut their standard variable rate (SVR) in full in line with the Bank
of England rate cut. Hats off to them for not reneging on this pledge after the
announcement of the unpredicted 1.50% base rate cut. They will drop their rate to 5.00%
with effect from 1 December."
Stewart Baseley, executive chairman of the House Builders Federation, said: "This is a
welcome and bold move by the Bank, and recognition of the unique economic situation.
"As the Government indicated last month when announcing its proposals to inject
liquidity in to the banking system, it is now imperative that the Government insists that
the banks pass the rate cut on to homeowners.
"Hopefully then, the combined steps taken by the Bank and Government will result in a
return of some sensible levels of mortgage lending and increased consumer confidence."
Ray Boulger of mortgage brokers John Charcol, said: "Today's stunning 1.5 percentage
point cut in Bank Rate to 3 per cent is way beyond even the most optimistic expectations
and the accompanying, much longer than usual, statement from the Bank of England
comments that "there has been a very marked deterioration in the outlook for economic
activity at home and abroad." It added "the Committee has revised down its projected
outlook for inflation which, at prevailing market interest rates, contains a substantial risk
of undershooting the inflation target." These comments indicate that further cuts are still
likely to be needed in the near future, especially if much of this cut is not passed on to
borrowers."
Rupert Dickinson, chief executive of Grainger, the UK's largest listed residential
landlord, said: "I am delighted that the Monetary Policy Committee has taken decisive
action and cut interest rates by 1.5%. Key economies are recognising that this recession
could be deeper and longer than expected and are finally acting accordingly.
"Such a significant cut will help restore liquidity and shore up the credit market. Banks
should be encouraged to pass most of this cut onto consumers, improving housing
affordability and allowing first time buyers to re-enter the market.
"Previous MPC decisions have exasperated house price inflation by keeping rates too low
in the past. Mortgage availability did not improve significantly after the last 0.5%
reduction, so the housing market remained stagnant and needed this injection."