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07 Feb, 2008

Laura Stavro-Beauchamp
Date: 07-Feb-2008

The Bank of England's Monetary Policy Committee has slashed the base rate by 0.25% today, bringing it down to 5.25%.
The cut has been predicted by many across the financial industry and follows rate drops by the American Federal Reserve in January and February.

There is some concern that lenders are not passing rate cuts on to consumers, which would counter the BoE's efforts to reduce strain on the finances of home owners.

The last rate cut was in December and many lenders were taken to task for maintaining higher interest rates in face of recessionary concerns.

Michael Coogan, director general of the Council of Mortgage Lenders, says: "This is good news for the quarter of UK borrowers on tracker rates who will see an imminent reduction in rates.

"However, borrowers should not expect that a base rate reduction will automatically result in a cut in standard variable rates or discounted rates across the market."

He adds: "Lenders' rate setting policies are more complex than simply the level of the base rate. They are determined by a range of factors including the cost of retail funding and the cost and availability of wholesale funding."

Jonathan Cornell, managing director at Hamptons International Mortgages, says: "By decreasing interest rates it is hoped that the economy will be cushioned and thus the housing market supported for another month.

"However, the question on all borrowers' lips will still remain- when is the respite coming?"

He adds: "Lenders reluctance to pass on respite this month will now be met with resistance. However, in the current climate where there is a chronic lack of supply of mortgage funding, there is a very real danger that new borrowers will see much less of a cut than many of them were hoping for."

Woolwich has revealed it is cutting its SVR and base rate tracker by 0.25%, as of March 1, after the MPC's decision.

Andy Gray, head of mortgages for the Woolwich, says: "We would encourage all borrowers to make sure they get the best deal available and there are always better deals than the SVR.

"Even when promotional deals come to an end customers should make sure the product reverts to a competitive rate."

Edward Menashy, chief economist at Charles Stanley Stockbrokers, says: "The cavalry have returned to save the fort.

"Many will find the current reductions in interest rates as questionable given the pressure from inflation. Inevitably the choice is between two evils: no cuts and a possible recession; cuts and possible inflation."

Ian McCafferty, chief economic adviser at the Confederation of British Industry, says: "The bank's own forecast in November suggested that two rate cuts of 0.25% would be required to meet its inflation target in 2009, and today's cut brings the base rate down towards a more neutral position.

"This should help ensure that there is a soft landing to the slowdown now underway."

He adds: "Looking ahead though, the bank must balance the effect that cutting rates while inflation is rising might have on its credibility, with the likelihood that further out, the slowing economy will have brought inflation back below the 2% target."

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