MPC cuts interest rate to 5%

The Monetary Policy Committee has slashed Bank of England base rate to 5% today.

The move was widely expected and is the third interest rate cut since December last year.

The Bank of England had come under pressure from a former MPC member, Sushil Wadhwani, to deliver a cut.

Dr Wadhwani accused the central bank of complacency, arguing that Britain’s housing bubble was as large as in the US.

Richard Lambert, director-general of the Confederation of British Industry, says: “This cut was badly needed and will be welcomed by a business world that is feeling the pressures of the credit crunch and of slower growth.

“Higher interbank and mortgage lending rates are dampening investment, consumer demand and economic activity, and today’s cut should ease conditions a little.”

Jonathan Cornell, managing director at Hamptons Mortgages, a leading UK mortgage broker, says: “With Halifax reporting the largest monthly slump in house prices since 1992, and the tightening of credit conditions throughout the market, the MPC has been under considerable pressure to cut the base rate a month earlier than many economists predicted.

“However, as inflation reached the highs of 2.5% in February and is expected to increase to 3% in the next couple of months, the MPC has taken a beating from both sides.”

He adds: “A cut in rates should in theory inject some confidence into a rather nervous market and ease repayments for existing borrowers on variable and tracker rates.

“But as mortgage lenders funding costs are not linked to the base rate and are severely constricted as a result of the liquidity crunch, new rates aren’t really going to come down as the demand exceeds the supply. It is possible that some lenders will not pass on all of the cut in their standard variable rates.

“As house prices fall to levels close to what their owners paid last year many borrowers are beginning to worry.”