Cut in interest rates offers little comfort to borrowers

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The Independent Online

The Bank of England cut interest rates yesterday but the misery of millions of homeowners was predicted to continue as mortgage lenders sought to stockpile cash for harder times.

After the base rate fell by a quarter point, HSBC, HBOS, Barclays, Lloyds and the Nationwide Building Society announced they would reduce their standard variable rate accordingly, cutting the monthly payment on a £250,000 loan by £50. However, the Council of Mortgage Lenders warned borrowers not to expect market-wide falls in standard variable and discount rates. Michael Coogan, director general of the council, said: "Lenders' rate-setting policies are more complex than simply the level of the base rate."

The cost of wholesale lending has risen sincelast summer following the loss of billions of pounds on sub-prime loans to poor Americans.

In a statement accompanying its new, 5.25 per cent base rate, the Bank of England said: "The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued. In the UK, credit conditions for households and businesses are tightening. Consumer spending growth appears to have eased."

But the Bank's Monetary Policy Committee ruled out a bigger cut because of the risk of inflationary pressures overheating the economy. Food and petrol prices have risen strongly in recent months, along with energy prices, which E.ON hiked by 13 per cent yesterday. Mervyn King, the Governor of the Bank of England, has warned that inflation could rise substantially above the Government's 2 per cent target.

Economists expect, nonetheless, that the central bank will lower rates further this year, as the credit crunch which has tightened lending and depressed economic growth increases in severity.

Philip Shaw, the chief economist at Investec Securities, believed the vote to cut rates reflected the economic slowdown, but predicted the Bank would be cautious about making further cuts.

Ray Boulger, of the mortgage broker John Charcol, said base rate cuts were having less of an impact because 55 per cent of mortgages taken out today were on fixed rates, while lenders were also failing to pass on the savings. "Around 20 per cent of lenders did not pass on the whole of December's rate cut and I expect the proportion to be higher this time around," he said.

Between May and December, Bank of England figures show that lenders' average standard variable rate climbed from 7.2 per cent to 7.6 per cent, adding £90 a month to repayments on a £250,000 loan.

Vince Cable, the Liberal Democrat Treasury spokesman, said: "The reality is that the Bank of England has little room to manoeuvre as the high cost of oil, food and wage demands continue to drive up inflation. For too long house prices, not included in the Bank's inflation measurement, raced out of control. We are now in real danger of paying the price for this."

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