BoE Cuts Rate to 2%, Home Prices Fall

123jump.com Staff
04 Dec, 2008
New York City

The Bank of England lowered its key lending rate by 1% to 2% and cited that the economic downturn has gathered pace. The sharper than expected rate cut raised questions about the health of the economy. The central bank expects inflation to decline as food and energy prices fall. Home prices fell.

[R]1:00PM New York, 6:00PM London – The Bank of England slashes rate to 2%. U.K. house prices drop 14.9% to £163,605.[/R]

London stock indexes fell marginally after the rate cut by the Bank of England ignited worries that the recession will be deeper than expected.

House prices also slid 14.9% from a year earlier.

In London trading FTSE 100 index fell 0.15% or 6.35 to 4,163.61.

Of the FTSE 100 index stocks 40 rose, 61 declined, and one was unchanged. Eurasian Natural led advancers in the index shares with a rise of 9%.

Bank of England Cuts Rates to 2%

Bank of England elected to slash its key rate by one percentage points to 2% on signs that the economic “downturn has gathered pace.”

Consumer spending, business investment and residential investment continue to drop and the central bank observed that it was unlikely to restore the normal volume of lending without adopting further measures.

The central bank forecasts that the consumer price inflation will continue falling on declining food and energy prices, while the temporary reduction in Value Added Tax is expected to lower CPI inflation through next year.

The BoE notes that the temporary reduction in VAT will lead to some volatility in inflation over the next two years but the new fiscal plans are unlikely to have a significant effect on inflation beyond that.

“At its December meeting, the Committee judged that, at the existing level of Bank Rate and looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a substantial risk of undershooting the 2% CPI inflation target in the medium term,” said the central bank in a statement.

The minutes of the meeting will be published on Wednesday December 17.

U.K. House Prices Fall 14.9% to £163,605 in November

HBOS Plc reported today that U.K. house prices fell 2.6% from a month ago and plunged 14.9% from a year earlier to £163,605 in November.

Low home affordability, reduced spending power and decline in access to mortgage finances are negatively affecting consumer demand.

However, UK average house price is still up 124% or £90,000 higher than ten years ago.

According to HBOS, the house price to average earnings ratio has fallen from a peak of 5.84 in July 2007 to an estimated 4.56 in November 2008.

Average earnings increased at an annual rate of 3.3% in September, while the Retail Price Index gained 5% in the review period.

Fuel and food prices rose 39% and 10% correspondingly reducing the amount of discretionary income available to householders.

HBOS says the number of mortgages approved remained unchanged at 32,000, while the number of completed home sales in England and Wales in August was 64% lower than a year earlier.

Gainers & Losers

Eurasian Natural led advancers in FTSE 100 index shares with a rise of 9% followed by increases in HBOS Plc of 7.4%, in Fresnillo of 7.2%, in Legal & General Group of 6.4%, and Friends Provident of 6.3%.

Retailers also rose. Kingfisher 4.4% and Next Plc gained 3.1%.

3i Group Plc led decliners in the FTSE 100 index shares with a drop of 8.9% followed by losses in Xstrata of 8.8%, in Stagecoach of 7.1%, in Hammerson of 6.5%, and Old Mutual of 6%.

Commodity stocks fell after oil prices dropped to $45.4 per barrel and copper prices plunged to $1.5130 per ton. Antofagasta dipped 4.4% and Rio Tinto shed 5.3%.