Rate cut bonus for homebuyers

HOMEBUYERS received a surprise boost yesterday when the Bank of England cut interest rates to their lowest since 1955. But the unexpected decision to reduce the base rate from 3.75% to 3.5% is a sure sign that its concerns about the economy are deepening.

The move will delight borrowers - whose mortgage rates will dip to their lowest for more than half a century - and industry leaders. It could knock £12 a month off the cost of a standard £80,000 mortgage, which could help to tempt more first-time buyers on to the property ladder.

But savers could see returns slashed. More than ten million people - many of them pensioners - rely on savings to boost incomes.

Mortgage lenders will review their home loan rates after yesterday's decision. Lloyds-TSB - which lends through Cheltenham & Gloucester - Barclays, the Woolwich, the One account and Sainsbury's Bank have already said they will pass on the cut to borrowers.

But analysts warned that many lenders would not pass on the full reduction. The last time rates went down, in February, banks and building societies tried to protect savers by not passing on the entire cut to homebuyers.

There is a feeling among many lenders that the balance should swing towards savers, especially as savings accounts outnumber mortgages by around six to one.

Yesterday's move by the Bank's monetary policy committee is a clear signal that it fears there are tough times ahead - and it will be a blow to Chancellor Gordon Brown, who expected a turnaround to finance his spending plans.

Most analysts believe that the Chancellor's forecasts for growth were too optimistic - and the decision will add to speculation that he may have to raise taxes, borrow more, or cut his spending on schools and hospitals.

David Laws, Liberal Democrat Shadow Chief Secretary to the Treasury, said: 'The cut in interest rates serves to highlight that all is not as well for the economy as Gordon Brown likes to pretend.'

In a statement yesterday, the MPC said the global economic recovery remains 'hesitant'.

The Bank is trying to ease the pressure on manufacturers and respond to tumbling share markets and weak growth. It also wants to head off the threat of a further downturn.

Figures this week showed a further slump in industry. In addition, the High Street sales boom is fading and house prices are falling in some areas.

Some critics argued that by lowering the cost of borrowing, the Bank may do little to help manufacturers - but fuel a credit and house price boom which could lead to a crash.

But business leaders praised the decision. David Frost, director-general of the British Chambers of Commerce, said: 'The business sector needs a boost. Manufacturing continues to shed jobs and the service sector has also suffered a slowdown.'

Ian McCafferty, chief economist at the Confederation of British Industry, said: 'The move will help to support the economy, which has lost momentum this year.'

However, the lowest interest rates in over a generation mean many savers will struggle to make ends meet as their income falls. In 1998, £5,000 in Halifax's Instant Saver account would have yielded £337.50 a year at a rate of 6.75%. But today's paltry 1.9% will net the saver just £95.