That’ll do for now..a quarter of a percentage point is about right. But the economy’s in uncharted waters with slowing growth and rising inflation.

This was the Bank of England's biggest rate cut dilemma. Last month, in the face of intense pressure to cut, the interest rate setters decided to keep their fingers off the button, but since then their US counterparts have been slicing huge chunks off the cost of borrowing to try to help the economy out of its rut.

So , the calls for the Bank of England to follow suit have been deafening – business in particular wanting a half point cut to reflect how the domestic and global conditions have weakened since their last meeting.

But mortgage holders who normally benefit from a lower base rate, if the past reductions are anything to go by, won't find their lenders in a hurry to follow suit. The credit crunch is squeezing their margins and they've been very mean with whatever they are managing to make. When the interest rate was last at 5.5%, last spring, the average mortgage rate was 5.66%. Before today’s move, with the base rate at 5.5% again, the average has crept up to 5.93%. Savers, unfortunately, will find that their rates will probably reduce by more than the bank's cut.

As far as the economy's concerned a quarter per cent cut is about right – enough to give a nod to growth, but still trying to keep a tight hold on inflation. Raw material and factory gate prices are the highest since 1999, and even the government’s preferred measure of inflation, the Consumer Price Index, which I think struggles to be truly representative of how everyday prices are rising, is above target and will go higher.

One glimmer of hope in the Bank of England’s comments after their decision is the relative weakness of the pound. That’s a help to exporters, and may be a help through what is clearly going to be a weak 2008.

Posted by Michael Wilson, Business Editor

Comments

[Elizabeth Davies Cape Town 12 Feb 2008 14:47:13]

Cutting the interest rate isn't always the best solution. What happened to Mr Brown's "Prudence", maybe use her to control a Britain which is too rich for it's own good. The haves don't care and the have nots have no idea, inflation is the hardest game in town to keep down!

[Ian in Surrey 7 Feb 2008 18:10:07]

Listening to Bloomsberg analysts today they clearly believed the UK housing market had strong similarities to the US but is a few months behind the US. Both Alan Greenspan and Warren Buffet have in speeches made over the last few months indicating a similar conclusion.

What Britain requires is the same as the USA - EXPORTS (i.e. income) to fund its expensive spending aspirations. Either that, or changes need to be made to decrease our spending patterns.

If no change happens - then the result will inevitably be a harder landing later.

Based upon historically analyses, there is no shortage of accommodation in the Uk,and prices relative to earnings are at a peak, borrowing (government, personal and institutional - such as hospitals0 is at an all time high relative to national incomes, pension funds are depleted and the young are with student loans.

As someone who has benefitted hugely from inceased house prices during my life, I look at youngsters coming out of university - and their outlook and financial position - and this is truly worrying.

On one hand they have little opportunity to participate in even moderate living standards without huge loans, and on the other - in the future paying for the national and civil service pensions will place them under an additional burden in the future.

There is a feeling of unease in the UK - the balance is wrong.

The BOE has 'pushed on a piece of string' in reducing interest rates - but the outlook for substantial house price reductions does indeed look similar to that in the USA - and maybe we should wlecome that as a key part to motivate our youngsters - with a work rather than the speculative ethic which appears to have caused much of this crisis and is evidenced in the current BTL problems.

I believe some good will come out of the changes that are about to occur - just like pruning a bush encourages fresh growth.

[Khalid 7 Feb 2008 13:38:10]

Indeed such are economical times that many a saver wants more in the way of interest and many a customer seeks a cut in order to provide further stability.
As far as mortgage lenders, practices past have indeed swayed in the favour of the lender leaving many a start up enterprise high and dry.
So, as Rome wasn't built in a day, lenders need to take future prosperity into consideration, pass on the .25% cut to all mortgage holders and watch the booming economy pay dividend to all, other than that [Tell It To My Heart-Taylor Dayne].