Good news for homeowners as Bank cuts rate

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Homeowners received a much-needed boost today after Bank of England policymakers cut interest rates for the second time in three months.

The Bank's nine-strong Monetary Policy Committee (MPC) voted to trim rates by a quarter-point to 5.25% amid growing signs of a slowdown in the economy and a cooling housing market.

But hopes of a more dramatic cut were dashed, despite calls from retailers for a reduction to 5%.

Today's decision to shave rates will reduce monthly repayments on a typical £100,000 mortgage by around £16 a month to £722.80, based on a new rate of 7.25% .

Those who are heavily mortgaged with a home loan of £250,000 will see around £40 knocked off their monthly repayments. It comes at a time when homeowners are faced with rising petrol, energy and food costs.

The Bank recently hinted that borrowers expecting similar cuts to those seen last month in the US would be left disappointed.

The US Federal Reserve slashed rates by 1.25% in less than two weeks in an attempt to stave off an economic recession.

Rising inflation on this side of the Atlantic has left policymakers with a difficult task.

Oil prices surged to record highs this year and households are also facing steep hikes in energy bills, with E.ON today becoming the latest to increase gas and electricity prices.

The Bank of England said in a statement accompanying its decision: "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.

"Although the substantial fall in the sterling exchange rate is likely to promote re-balancing of total demand, output growth has moderated to around its historical average rate and business surveys suggest that further slowing is in prospect. These developments pose downside risks to the outlook for inflation."

It added that while inflationary pressures are an immediate concern, the Consumer Prices Index was set to come down later in the year.

"CPI inflation, at 2.1% in December, was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months. And the lower level of sterling will boost import costs. The impact on inflation should begin to fade later in the year, but measures of inflation expectations are currently elevated."

It added: "The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below the target in the medium term against the risk that elevated inflation expectations keep inflation above target.

"Against that background, the Committee judged that a reduction in Bank Rate of 0.25 percentage points to 5.25% was necessary to meet the 2% target for CPI inflation in the medium term."