Alliance & Leicester: MPC decision to cut bank base rate to 5.25%

Today’s decision by the MPC to cut the Bank Rate to 5.25% was widely expected following a continued weakening of sentiment within the market on the back of a range of data.

The UK property market continues to show signs of cooling with the different House Price Indices broadly reporting soft house price growth over the last four months, and mortgage approvals falling to 73,000 in December, down from 81,000 in November and well below analysts’ expectations of 79,000.

Mark Blackwell, Director of Intermediary Sales at Alliance & Leicester, comments: “Whilst borrowers paying a variable or a rate linked to three month LIBOR will welcome the reduction, there is no guarantee that the MPC will follow the recent Fed moves, given that the UK economy is structurally still in good shape and employment levels remain high. In such an environment borrowers need to think carefully about the down side of locking into variable rates as recent history has shown economic sentiment can change very quickly and rates can go back up.”

With the Base Rate now back at a level not seen since January 2007, the rate view remains uncertain given the unfolding developments and continued unease within the US economy.

Mark Blackwell continues: “Fixed rate products continue to be a wise choice for first time buyers. People moving house or remortgaging should also seriously consider taking a fixed rate product. With 1.4 million borrowers due to come off very low fixed rate products throughout 2008, choosing another similar product will help to manage the impact of higher monthly payments by fixing the amount and will help homeowners to budget accordingly. Currently fixed rates are priced 50 to 60 basis points below trackers, so this option may not be the best one as homeowners will need to see at least two or three cuts before they would see any benefit. Since the trackers are variable, the monthly cost of the mortgage would increase if rates started to go up.

“As more and more people delay making a move onto the property ladder, landlords will continue to see high levels of occupancy. Those with a sizeable deposit or equity in their property may want to consider looking at a tracker product, but again a fixed rate mortgage product offering set monthly payments looks to be a prudent choice for landlords in the current economic climate.”

The policy makers at the MPC continue to face a difficult balancing act over the next few months with inflation widely expected to remain above target but with increased concerns that the UK economy is set to experience a significant slowdown in growth. Despite concerns over inflation, the committee has acted promptly to counter the growing downside risks to the economy, but will not hesitate to increase rates to limit the upside risks to inflation.