Relief for homeowners as mortgage costs fall

The cost of mortgages fell today giving home-owners a long-awaited break from the credit crunch.

It came after the Bank of England cut its interest rate from five per cent to 4.5 per cent at noon in a shock move 24 hours ahead of its scheduled decision.

Central banks around the world also dropped their rates today in a co-ordinated move to prevent a global economic meltdown.

The US Federal Reserve reduced them from two per cent to 1.5 per cent and the European Central Bank trimmed its rate from 4.25 per cent to 3.75 per cent. The central banks of Canada, Sweden and Switzerland all took similar action.

The Bank of England move will bring immediate relief for hundreds of thousands of homeowners on tracker mortgages. The monthly repayments for a borrower on a typical £200,000 London mortgage will fall by around £60.

It is also likely to feed through to fixed rates for first-time buyers and owners looking to remortgage.

Halifax, Barclays and Lloyds TSB were the first banks to cut their standard variable rates in line with the Bank of England. It was thought likely that the other five lenders named in this morning's rescue announcement — Abbey, HSBC, Nationwide, Royal Bank of Scotland and Standard Chartered — will follow suit soon.

The Bank of England said that the rate cut was justified by likely falls in inflation in the coming months.

It said in a statement: "Although inflation was likely to rise above five per cent in the coming months, it will then drop back towards the two per cent target. Some easing of global monetary conditions is therefore warranted."

The Bank said conditions in the money markets "have deteriorated very markedly" in recent weeks and lending to households and businesses was hard to come by.

Economists welcomed the rate cut. Accountancy firm Grant Thornton's chief economist, Stephen Gifford, said: "In many ways we are in the last chance saloon. The same-day response to the financial crisis from the Bank of England and Treasury is certainly unprecedented and let's hope this has the desired impact.

"It must work as there is not much left in their armoury. The key now is for the markets to respond to this intervention with reason and a measure of realistic optimism. We must now begin to help talk ourselves out of a recession, as we certainly have helped talk ourselves into one."
The rate cut was welcomed in the City where the FTSE 100 index immediately overturned heavy morning losses to stand up 20.59 at 4625.81. City economists forecast further cuts in the coming months to as low as 2.5 per cent.

The Bank of England called the emergency meeting of the rate-setting monetary policy committee this morning following last night's talks in Downing Street to thrash out the rescue plan for the banks.

It was not due to meet until 2pm today with the decision announced at midday tomorrow but it was brought forward to co-ordinate with other central banks.Richard Snook of the Centre for Economics and Business Research said: "It has been an unprecedented week and we needed action."

Julian Jessop, chief international economist at Capital Economics, said the cuts "will provide at least a temporary boost to confidence but we fear that there is still a lot more work to do".

He added: "The fact that the central banks have had to take such extreme measures underlines how bad market conditions have become. More generally, the economic and financial imbalances have taken years to build up and may take just as long to unwind.

"Accordingly, we expect today's moves to be the first in a series — whether co-ordinated or at scheduled meetings —with rates eventually falling to 2.5 per cent in the UK, 2.0 per cent in the euro-zone and just 0.5 per cent in the US."

Senior City and business figures were cautiously hopeful today that the scale of Alistair Darling's bank rescue package would bring an end to the financial crisis.

David Buik, partner at BGC Partners, said: "In the short term this has to be seen as positive because it is calming frayed nerves. But the idea of semi-nationalisation is very regrettable because it means there will be a dilution of equity and lack of control and freedom of movement.

"But to help out with lack of liquidity is a positive and sensible step. The UK government took too long to react to this problem, it should have happened six months ago."