There was good news for British consumers this week as a top investment bank speculated that the Bank of England could reduce interest rates in the coming months.
After a string of interest rate rises, the Bank of England decided to leave its base rate unchanged at 5.75% in September as it adopted a more cautious wait and see approach amid the worsening sub-prime mortgage crisis.
Interest rates have remained unchanged since then but British borrowers have seen a steady rise in costs as the global credit crunch took hold. Higher borrowing costs and a slowdown in house price growth has worsened the situation for sub-prime borrowers on low incomes as they struggle to keep up with mortgage repayments. In fact, repossessions have soared.
However, evidence of a steep rise in inflation published this week could prompt the Bank of England to cut interest rates. Inflation data published this week by the Office of National Statistics showed a 0.3% increase in the annual rate of the Consumer Price Index (CPI) measure of inflation between September and October, the Bank of England's key indicator.
“Just a few months ago, we were in a situation of rising inflation and rising interest rates. There then followed a period of relative stability, as inflationary pressures reduced, but now we see CPI rising above the government target of 2% and the broader based RPI at 4.2%, according to the Office of National Statistics,” says Anthony Haynes, managing director of Abbey International.
“The Bank of England is now expecting a sharper slowdown in economic activity than it did just three months ago and the Inflation Report projections open the door to lower interest rates if we see relatively weak economic data in the near future.”
So what would lower interest rates mean for the average British consumer, and for the economy in general? First of all, lower interest rates would be good news for borrowers and homeowners. The rising cost of credit in recent months has put many people under financial pressure. Any interest rate cut by the Bank of England may would this.
Earlier this week, the Department of Communities and Local Government (DCLG) confirmed that house prices inflation is slowing down dramatically. Any cut in interest rates should have a positive effect on house price inflation by reducing repossessions and increasing demand.
A decision by the Bank of England to reduce its base rate may also ease the losses suffered by financial institutions from the US sub-prime crisis and global credit crunch. While much of the damage has already been done, lower interest rates would mean fewer repossessions in the future. In fact, there was encouraging news in this regard this week as Barclays announced that losses associated with the sub-prime crisis were much lower than expected.
A cut in interest rates would be good news for the vast majority of British consumers. However, if you have large amounts of money deposited in savings accounts you could see a drop in interest earnings. However, given the uncertainty surrounding the stock markets and housing market they may be the safest investment option for the time being.
With petrol hitting the $100 per barrel mark, and the cost of food and credit going up, many British consumers are feeling the pinch. If these trends continue, there is a high possibility of a reduction of interest rates in the near future.