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News - 8 December 2007
Bank of England

Bank of England moves to avoid slump

Only once before in the last decade has the Bank of England moved interest rates is December. The decision to do so last week tells a story in itself and was a reflection of the tough times facing the UK economy in 2008.

The decision to reduce rates from 5.75 to 5.5% was prompted by several factors – none of them encouraging.

The Chartered Institute of Purchasing & Supply (CIPS) survey of business activity reported a sharp slowdown in November.

The Halifax House Price Index fell by 1.1% in the same month bringing the total fall since August to 2.4% and there was a corresponding sharp decrease in the number of new loans both because banks are getting more particular who they lend to and borrowers are tightening their belts.

The Financial Services Authority (FSA) told a conference of mortgage lenders on Tuesday that there was “a very real prospect that conditions will worsen further into the next year in terms of both liquidity and credit risk”

There are approximately 1.4 million borrowers whose two year fixed rates on their mortgages come to an end in 2008 and there is a general consensus that many of them will find the new monthly payments too much to afford. Repossessions are forecast to increase by 50% next year.

Meanwhile lending between banks themselves has been severely curtailed by the three-month interbank rate which is currently 6.6% when it is traditionally a fraction above the base rate (5.5%).

Consumer spending is widely predicted to wither after Christmas and a soaking December isn’t exactly encouraging shoppers to make this the last hurrah before belt tightening.

If house prices go into reverse, which many commentators are saying is not a matter of “if” but rather “by how much” the illusion of wealth enjoyed by many consumers will disappear and with it the consumption that has buoyed up the economy.

Next year may be one of the toughest for a decade.

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