BoE Cuts Rate to 1%, Low Inflation Expectations

Darlington Musarurwa
05 Feb, 2009
New York City

The Bank of England cut its key lending rate by 0.5% to 1% as the UK economy shows no sign of stabilizing. The latest move comes on the expectation of inflation falling below 2%. Home prices in January declined 17% from a year ago but gained 1.9% from December.

[R]1:00PM New York, 6:00PM London – The Bank of England cuts interest rate to 1%. U.K. house prices rise 1.9% in January.

London stocks rose marginally after a report showed that home prices increased 1.9% in January and on signs that the prices might be stabilizing.

In London trading FTSE 100 index rose 0.01% or 0.33 to 4,228.93.

Of the FTSE 100 index stocks, 50 rose, 49 declined, and 3 were unchanged. BG Group led gainers in the index shares with a rise of 10.2% followed by TUI Travel gaining 8%.

Bank of England Slashes Rate to 1%

The Bank of England today elected to slash its key rate by 0.5 percentage points to 1%. The central bank has slashed the rate sharply in the last five months as the UK economy has weakened on falling housing prices and weak retail sales.

Output is forecasted to remain depressed in the early part of this year, while supply of credit remains constrained.

According to the central bank, inflation is forecasted to decline below 2% by the second half of the year on dropping contributions from retail, energy and food prices and the direct impact of the temporary reduction in Value Added Tax.

The Bank of England, “At its February meeting, the Committee noted that, although the transmission mechanism of monetary policy was impaired, the past cuts in Bank Rate would in due course nevertheless have a significant impact. Together with the recent easing in fiscal policy, the substantial fall in sterling and past falls in commodity prices, that would provide a considerable stimulus to activity as the year progressed.”

The minutes of the meeting will be published on Wednesday February 18.

U.K. Home Prices Rise 1.9% in January

Halifax reported today that the country’s home prices rose 1.9% in January from a decline of 1.6% in December. However, prices plunged 17.2% from the same period a year ago.

The report notes that mortgage payments dropped from 31% of gross earnings for the average new borrower in the first half of 2008 to 21% in January, while home price to average earnings ratio fell 23% to an estimated 4.48 in December 2008 from a peak of 5.84 in July 2007.

Halifax housing economist Martin Ellis said, “There are some very early signs that market activity may be stabilising, albeit at quite a low level. Nonetheless, continuing pressures on incomes, rising unemployment and the negative impact of the dislocation of the financial markets on the availability of mortgage finance are expected to mean that 2009 will be a difficult year for the housing market.”

Gainers & Losers

BG Group led advancers in the FTSE 100 index shares with a rise of 10.2% followed by increases in TUI Travel of 8%, in Royal Bank of Scotland of 5.8%, in Lloyds TSB Banking of 5.7%, and Xstrata of 5.2%.

Unilever led decliners in the FTSE 100 index shares with a fall of 5.9% followed by losses in Legal & General of 5.4%, in British Land Co. of 5.3%, in Land Securities of 5.2%, and Reckitt Benckise of 4.9%.