Surprise cut in UK interest rates

Investment property news: BBC ONLINE

The Bank of England has surprised City analysts by cutting interest rates by one quarter of a percentage point.

After 14 months on hold, rates have been cut to 3.75%, taking borrowing costs to their lowest level since 1955.

It is a sign of how worried they are about the economy.

The move surprised City analysts, who had thought that the Bank would maintain rates at 4% to keep a lid on the housing market and general inflation.

House prices last month were 24.9% higher than in January 2002, Halifax, the UK's biggest mortgage lender, said on Wednesday.

But the Bank warned of a gloomier economic outlook.

"Over the next two years, the prospects for demand, both globally and domestically, are somewhat weaker than previously anticipated," a Bank statement said.

While inflation was, at 2.7%, a "little above target", the Bank attributed the rise to temporary factors.

The cut would help keep inflation "on track", Thursday's statement added.

In Frankfurt, the European Central Bank left the key interest rate for eurozone countries on hold at 2.75%.

Cut to mortgage rates?

The cut prompted lender One, formerly Virgin One, to reduce its headline mortgage rate, with rivals such as Halifax, HSBC and Nationwide yet to decide whether to follow suit.

But the cut heralded bad news for shareholders, raised fears of higher inflation and sending stocks lower.

"This is one of the biggest gambles any central banks has done - cutting rates when house price inflation is close to 30% and inflation is already above target," said John Butler, UK economist at HSBC.

"It is true to say [the Bank is] playing with fire."

Ross Walker, UK economist at Royal Bank of Scotland, said: "I can see nothing in the data that suggests the UK consumer needs further interest rate easing."

But Simon Rubinsohn, chief economist at fund manager Gerrard, said the cut, while "surprising", was "warranted".

"With the exception of the house price indices... most other recent pieces of economic news have been downbeat at best," Mr Rubinsohn said.

"Manufacturing appears to be sliding back into recession... the consumer is turning more cautious and the non-retail service sector is coming under greater pressure."

The benchmark FTSE 100 share index closed down 81.7 points at 3,597.0.

- 04 August 2005