Rate cut is good but tough times are ahead

Buy-to-let broker Mortgages for Business is warning that while the drop in Bank of England base rate is good news there are still tough times ahead in 2009.

David Whittaker, managing director of Mortgages for Business, says that all eyes are now on three-month LIBOR and the money markets to gauge reaction and the resulting cost of funds.

Whittaker says: “Bearing in mind Mervyn King’s comment earlier in the month, the reduction is no real surprise and is confirmation that we are heading for tough times in 2009.

“All eyes now on the three-month LIBOR rate tomorrow and it will be interesting to see how the money markets react. Yesterday it stood at 3.79% and it is likely to be around 3.72% today.

“What we need now is for the gap between Base Rate and LIBOR to continue to narrow although it may still be a few months before we go back to the traditional spread of 15-20bps.”

Whittaker says he would not be surprised to see a further cut early next year before rates level out and then start to increase slowly in 2010.