Bank of England - Base Rate Slashed to 1,5%

Liam Bailey, head of residential research, commented:

"This cut, which takes base rates to their lowest level in the 300-year history of the Bank of England, demonstrates that the Monetary Policy Committee recognises the serious challenges facing the economy. Although this cut is smaller than might be hoped, even lower rates would be unlikely to have any immediate effect on the housing market, and we believe prices still have a further 10% to fall."

"Mortgage finance remains difficult to obtain unless applicants have deposits of at least 25% for new purchases. It is also increasingly difficult for homeowners to remortgage – as prices fall, fewer have this level in equity and can negotiate a new package. With most commentators agreeing that further falls are likely until at least the end of the year, it is unsurprising that the highly risk-averse banks have adopted stricter criteria, and unlikely they will relax them in the near future. Also, although LIBOR has slipped back from the highs of last year, it remains fragile and unusually higher than base rates."

"Furthermore, while previous rate cuts have helped those on tracker deals, ‘collar’ clauses preventing rates falling beneath a certain level are increasingly being put into practice, most notably by Nationwide, will prevent many from benefitting from further falls in the base rate."

"It is clear that the gloom will continue for much of the rest of the year, particularly as economic outlook continues to deteriorate. However, the increasingly drastic action being taken by the Bank of England will help limit the duration of the downturn and bring the date of recovery closer. Nevertheless, further action to stimulate the economy may be necessary if the outlook for both the economy and the housing market is to become more optimistic in 2010."

Claire Higgins, head of commercial research, Knight Frank, commented:

"The gap between 3 month LIBOR and the base rate has halved since the last rate decision. Although it remains high in historic terms, it is an indication of banks’ increasing willingness to lend to each other. However, until this feeds through to banks’ willingness to lend on commercial property it remains difficult to see how a change in rates will impact upon our market. With values already at least 30% lower than at their peak, and with further falls anticipated albeit at a lessening rate, the breaching of covenants and ever decreasing loan-to-value ratios remain the most significant barrier to the banks’ re-entry into the commercial property lending arena. Without this stimulus, it remains in the hands of equity buyers to move the market. In that context, perhaps the only direct relevance of rate changes is that property looks increasingly attractive relative to keeping your money in the bank."

Courtesy: Knight Frank Residential Research

For further information, please contact:

Liam Bailey, head of residential research, Knight Frank,
Tel: +44 (0) 7919 303 148
Email: [email protected]