Official statistics show that one of the main measures of inflation has reached its lowest point since September 2004, another sign of sterling weakening. The annual rate of 1.1% in September was lowered from 1.6% in August by the Consumer Prices Index (CPI).

A separate measure of inflation conducted by the Retail Prices Index (RPI) found that mortgage interest payments and housing costs also dropped, from -1.3% to -1.4%.

The pound also reached its lowest point in the past six months when it fell 0.5% against the Euro to 1.0628 Euros and to a five-month low of 1.5730 US Dollars.

Weak

Duncan Higgins, a senior analyst for Caxton FX, felt that “this is bad news for the pound.”

“The CPI figures will weigh heavily on the UK currency and will continue to discourage investment.”

A report conducted by the Centre for Economics and Business research predicted UK interest rates would not rise above 0.5% until 2011 and fail to meet the 2% mark until 2014; a further damnation to the outlook for the pound.

Meanwhile, the strength of the UK economy was dealt a further blow last week when it was revealed that industrial output dropped in August.

A prediction for the GDP had to be recalculated by the National Institute of Economic and Social Research after the UK economy failed to grow during the June/September quarter.

However, the economy is still very “frail” according to the British Chamber of Commerce (BCC), despite business confidence improving.

In an effort to sustain a stable broader economy and prices, the Bank of England is making efforts to retain 2% CPI inflation. Should the CPI inflation drop below 1%, the governor of the Bank of England must provide a written explanation to the Chancellor, Alistair Darling.

High energy prices a year ago, in comparison to lower energy prices this September are being blamed for the recent fall in inflation. The Office for National Statistics (ONS) reported that electricity, gas, and other fuel bills tumbled by 7.3%. Energy costs have started to level more recently, with little change from August to September.

Jonathan Loynes from Capital Economics predicted that we can expect to see CPI back at the 2% mark by the start of 2010, due to increased energy prices and VAT returning to 17.5%. He does believe that a “huge amount” of unused production capabilities would keep inflation down and “keep alive the threat of a period of outright deflation late next year or beyond.”

In contrast, Keith Wade of Schroders UK forecasted that it “probably will be the low point in inflation.”

The Council of Mortgage Lenders (CML) has revealed that the number of new mortgages granted for August is down by 3,000 from 56,000 in July to just 53,000.

Despite such a large fall in granted mortgages, this is still 29% higher than last year’s figure for August.

The CML believe that house sales may have reached a plateau, as most first-time buyers still have to provide large deposits.

Overall, the total value of mortgage lending for buy-to-let and remortgaging for the past year is down by 36% on last years figures.

Long Recovery

The CML’s economist, Paul Samter believes “house purchase activity has revived from its moribund state at the beginning of the year.”

“It will be a drawn-out recovery process with seasonal ups and downs, but house purchase activity is now on a firmer footing.”

According to the CML’s figures, first-time buyers need to find on average 25% deposit in order to receive a home loan.

Regardless of whether a borrower is a first-time buyer or not, two-thirds of all mortgage deals require at least a 25% initial payment.

Relaxing

The Bank of England has claimed that the number of new mortgages approved in August, but not lent, has fallen for the first time in eight months.

From 52,317 approvals, down from 52,404 in July, is a sign that levels may be beginning to level off in the coming months.

Data shows that the number and value of house purchase loans is higher than a year ago, the total value of mortgage lending has dropped by a third.

Standard variable rates are very low, giving borrowers much less incentive to remortgage their house or seek out fixed rate mortgages elsewhere. Buy-to-let mortgages are also down  on a year ago.

“At £12.3bn, gross mortgage lending - which encapsulates all mortgage lending activity, including house purchase, remortgage and buy-to-let lending – declined 36% from August 2008,” the CML reports.

House Prices

The autumn of 2007 saw the onset of the credit crunch, with house prices taking a sudden downturn. Over the past few months, house prices have been steadily rising, giving hope that the recent recovery may become more prolonged.

House prices rose by 2.8% in the 3 months leading up to September, in contrast to the 3 months prior according to the Halifax; the first quarterly increase for two years. Further support to the encouraging recover was made when the Nationwide confirmed that house prices have risen continuously for the past 5 months and have returned to the level of September 2008.

Sales have doubled between January and August and the market seems much more stable in comparison.

Experts have warned, however, that the rise in house prices is supported by the shortage in new properties being put on the market. If there is a sharp rise in houses placed on the property market, the rise in house prices may come to a sudden halt.

Concerned

Chancellor Alistair Darling is to quiz bank bosses over how much small firms are charged for loans after he says he is very concerned that their rates may be too high.

He is worried that the cost of loans has risen even though the UK’s interest rates currently stand at a record low of 0.5%.

He also said that banks had a duty to restore lending levels, adding that the government didn’t save the banking sector out of “some charitable act.”

He said: “The public now understand it if they [the banks] don’t seem to be doing their part.

“I want them to rebuild their balance sheets… but at the same time, because of the particular circumstances we’re now in, because of the fact we’ve got this recession, we also need them to lend money. And that’s why we re-capitalised them to do that, and that means they’ve got to live up to the promises that they made.”

Rates Reflect Wholesale?

Many banks, including Lloyds (including Halifax and the Bank of Scotland), and the RBS (which includes NatWest and Northern Rock) received emergency funding from the government after the credit crunch began.

The Chancellor made these comments after an official report made by Moneyfacts said banks had increased the interest rates they charged for personal mortgages by nearly four times the amount in recent months despite the base interest rate remaining at 0.5%.

Chief executive of the British Bankers Association, Angela Knight, said banks had to pay a lot more than 0.5% for the funds they borrowed in the wholesale market, and therefore had to pass this on to their customers.

She added that despite this, banks are now ‘stepping up’ to meet the increasing demand for small business loans.

Time To ‘Haul In The Banks’?

Stephen Alambritis of the Federation of Small Businesses said that the chancellor was right to “haul in the banks”.

He believes: “It is hugely important that Mr Darling keeps tabs on the banks to ensure they are lending money to firms, and at fair rates. Firms need to be able to reap the benefits of the historically low base rate.”

Mr Darling also added that VAT will increase from its current rate of 15% to 17.5% again, after it was reduced at the beginning of December in order to help boost retail sales.

When looking at the wider economy, the chancellor says that he still believes that the economic recovery will begin to recover at the beginning on the year, with the most growth being seen in 2010.

Official figures released last week show that the British economy has continues its contraction between April and June of this year, though the rate was slightly slower than the previous quarter.

What Do You Think?

Are the banks taking advantage, or do their interest rates reflect wholesale rates they still have to pay? We would love to know your thoughts and opinions. Leave your comments here.

For the fourth month in a row the bank of England have decided to keep their interest rates at 0.5%.

It says it is not planning on extending quantitative easing, but will continue with the current plan of spending £125 billion in order to stimulate the economy.

This lack of intervention means that economists can accurately assess the economic data.

Without permission from the Treasury, the Bank’s Monetary Policy Committee (MPC) could easily have increased quantitative easing by £25 billion, but the Bank says it hasn’t done so this month to assess if the current measures are working.

Head of global markets at HSBC, Bronwyn Curtis said: “I don’t think they know yet [whether quantitative easing is working]. The other thing about pausing is that they can always do more if the economic data deteriorates again.”

Measures Had Enough Time To Take Effect?

The BCC thinks that the surplus money should still be used for the economy: “Quantitative easing is not yet fully effective and there is a strong case for raising the proportion of private sector assets that the MPC purchases.

“It is important to significantly increase the programme’s size, so as to underpin business confidence,” said their chief economist David Kern. He also said that the Chancellor should increase the scheme to £200 billion.

CBI’s Ian McCafferty says it is still too early to calculate the effects of the quantitative easing, agreeing also that more help was needed.

He said: “A further extension through the autumn is needed, and clear communication of the Bank’s intensions throughout will be critical in order to prepare the markets.”

Good News For The Pound!

Deciding not to increase quantitative easing did mean that the value of the pound sterling increased. It rose 1.2% against the US dollar to $1.6253. Its value against the Euro also increased by 0.4%, meaning one Euro is now worth 86.1 pence. This is said to have caught the market off guard.

“However,” says Currencies Direct’s Mark O’Sullivan, “if poor economic data continues to be released we would expect the Bank to announce further funds to help ease liquidity problems.”

Gilt prices decreased due to the news that the Bank was not going to buy any more government bonds.

It was widely expected that interest rates would remain at 0.5% however. Hetal Mehta, the senior economist of Ernst and Young believes the 0.5% rate will remain until the middle of 2010.

She said: “It can barely go lower and… an increase at this stage is out of the question.”

At the beginning of the week the BCC said that the worst of the recession of the UK was over, but that talk of recovery was still too premature for this stage.

What Do You Think?

Is pausing quantitative easing a good idea or not? Is the worst of the recession over? Have your say! Leave your comments here.

The Royal Bank of Scotland and NatWest has announced they will not be passing on the latest bank interest cuts their variable rate mortgage customers.

The bank, primarily taxpayer owned, admitted they had considered not passing the new 0.5% interest rate to their savings customers as well, saying its standard variable rate was already competitive, at 4%.

Other big UK mortgage lenders, including Nationwide and Lloyds TSB, have announced they will change their interest rates accordingly, some with more choice about it than others, and therefore, most of the 4 million people in the UK with tracker mortgages will reap the rewards of the cut.

What about Savers?

However, some banks are finding themselves obliged to cut their rates after promising their SVRs would only deviate a certain percentage from the Bank rate. For example, Abbey, refused to cut its rates last month, but has had to cut interest by 0.45% this time from April 1st.

Chief Executive of RBS retail banking, Paul Geddes said: “the continued downward trend to Bank of England base rate has had a significant impact on customer savings rates. It is more important than ever to consider both our savings and mortgage customers when determining any rate changes.”

The bank has made clear that interest rates for its savings accounts will fall by less than 0.2% on average, and many would go unchanged.  On the other hand, those who want to be familiar with banking trends may refer to websites such as lovemoney.com to aid them in their financial decisions.

It’s decision comes after the RBS last week announced its huge losses for 2008, and that it would receive another taxpayer cash injection, on top of the scandal of former boss, Sir Fred Goodwin’s pension.

Average Current Interest Rate

This is now the sixth Bank rate cut, and the average SVR now stands at 4.77%. this is probably partly due to the fact that only 41% of mortgage lenders passed on last months rate cut to their borrowers.

The director general of the Council of Mortgage Lenders (CML) said: “the latest cut presents immense challenges for lenders whose margins are already squeezed as a result of previous reductions, leaving little scope to lower discretionary mortgage rates further.

“Savings are the lifeblood of mortgage lending, and unless lenders can offer competitive rates to savers, their ability to offer new mortgages is restricted.”

A representative of mortgage brokers John Charcol, has predicted that many lenders that failed to pass on the February Bank cuts will have to do so this time. On the other hand, he suspects that many who did pass on the last rate cut will not change their rates this month.

What Do You Think?

Is RBS right to refuse to cut its rates this time? Should all banks be made to change their rates? Are interest rate cuts getting out of hand? Have your say here.

The Bank of England has finally reduced its interest rates to 1% to try and boost the UK economy by encouraging banks to lend more money.

This is the fifth interest rate cut since October, when interest rates were cut to 4.5%.

However, some fear that savers are going to feel the effects of the cut the most, and others are still saying it’s not enough.

The Bank of England has issued a statement saying that rate cuts, along with government measures to boost the economy, “would provide a considerable stimulus to activity as the year progressed.”

Lenders are responding to the seriousness of the situation

Many lenders have responded to the news by cutting their mortgage rates to match the change.

Halifax has said it will pass on the rate cut to customers with standard variable rate mortgages. And other lenders such as Nationwide, Lloyds and Barclays will also pass on the rate drop.

However, some business groups are worried the further cuts will not work.

 
What some of the businesses have to say about the change

The Federation of Small Businesses (FSB) has claimed we need to improve access to capital.

The FSB conducted a survey, the results of which showed that 63% of members wanted rates to remain at their current level, and only 24% wanted further cuts.

The FSB chairman said: “These figures suggest that the recent interest rate cuts are not having the desired effect and other means of economic stimulus are required.”

On the other hand, the Bank of England has said: “although the transmission mechanism of monetary policy was impaired, the past cuts in Bank Rate would in due course nevertheless have a significant impact.”

Other business groups have also welcomed the cut. Graeme Leach, the Institute of Directors’ chief economist has said: “The interest rate transmission mechanism is clearly impaired but it is not yet kaput.”

Ernst & Young also supported the Banks decision, but also said they expect interest rates to drop again, “possibly to zero”.

Ernst & Young’s senior economic advisor said: “six month ago the Bank was balancing slowing economic growth with accelerating inflation.

“However the Bank now had to act to avoid deflation without fear of a further weakening of sterling; a weaker currency should serve to add to the competitiveness of exports.”

Chief economist at the Chartered Institute of Personnel and Development, John Philpott said: “the Monetary Policy Committee is right to cut Bank Rate to 1%, even though some question the merit of doing so without greater effort to increase the availability of credit to hard-pressed businesses.

“With conditions in the job market deteriorating rapidly what’s needed now to stem the rise in unemployment is early action to boost the supply of money to our cash-strapped economy.”

 
What do you think?

Is another cut in interest rates enough? Is the government doing enough to help the UK through the recession? Have your say here.

The Bank of England has cut its interest rates to their lowest in its 315 year history, to just 1.5% to try and help the economy.

The rates are now below 2%, their lowest since the Bank of England was founded in 1694, though some are saying that more dramatic changes should have been made in the fourth cut since October last year.

The Bank of England has said: ‘contraction in business activity has increased during the fourth quarter of 2008, and that output is likely to continue to fall sharply during the first part of this year.
‘Surveys of retailers and reports from the Bank’s regional agents imply that consumer spending has weakened.’

The BBC economics editor has surmised that the Bank is now being more cautious after steep cuts in the final months of 2008. He said: ‘There is a hint in its statement that it may sit tight for a while to assess the impact of the big reductions over the last couple of months.’

Senior economist from Ernst & Young Item Club agrees that the cut is appropriate, but says more must still be done.
‘With survey data continuing to languish at record lows – manufacturing and services surveys in the past few days have confirmed that activity is falling sharply – we see no reason for the Bank to hold back in cutting interest rates to 1% or below in the coming months.’

Most customers with tracker mortgage deals will probably have the cut automatically passed on to them by their bank/building society.

People with an average £150,000 mortgage repayment will probably see their monthly bill drop by £46. However, those with standard variable deals must wait to hear from their lender whether the cuts will be passed on.

Lloyds, HSBC, HBOS, Nationwide and Skipton Building Society have already said they will pass on at least some of the reduction, but most banks are saying their rates are being reviewed.

Following the rate cut, the pound rose in comparison with the euro, before slipping back again slightly to 1.1077 euros, probably due to the bank deciding to only cut rates by 0.5%, as opposed to the expected 1%.

The cut comes in the midst of many struggling companies coming to light.

Among them, Nissan announced the cut of 1.200 jobs on Thursday, and Zavvi have gone into administration, closing 22 stores. Not to mention the recent closure of Woolworths, and M&S closing 27 of its stores across the UK.

The Treasury are denying any current plans to inject more money into banks via quantitative easing, though are not ruling it out.

Some newspapers are claiming quantitative easing is being considered once interest rates fall closer to zero in order to avoid deflation.

Graeme Leach, chief economist for the Institute of Directors has said the MPC’s apparent caution in not presently cutting rates any further ‘highlights the uncertainty over what effect the existing monetary and fiscal stimulus will have on the economy.’

It is expected that the Bank of England will cut their rates to their lowest on over fifty years.

Business leaders and economists alike have suggested an interest rate cut down to 2%, which has not been seen since 1951, in order to try to halt the current economic depression as much as possible.

It was just last month that the Bank announced that it would cut its interest rates by 1.5%, to 3%.

Minutes from last month’s meeting show that the Banks policy makers had discussed bigger cuts in borrowing costs, before settling on the dramatic reduction in interest rates.

Since then, there has been rapid deterioration in businesses since this meeting has raised fears that the economic crisis in Britain could be worse than originally feared.

Among our current economic problems includes the fact that  businesses are finding a continued restriction in bank loans, unemployment continues to rise, mortgage lending is still slowing, consumer confidence has fallen and shops are having to severely lower prices in order to attract Christmas shoppers.

Yesterday, a key measure in our services sector contracted in November at its fastest rate since at least 1996.

Also in November, the UK services purchasing managers’ index (PMI) dropped more than expected to a record low of 40.1, compared with 42.4 a month earlier. (Figures below 50 is a sign of their outlook worsening.)

Economists expect the Bank of England to respond decisively. George Buckley, chief UK economist at Deutche Bank has said: “They need to do something aggressive again, because of where the data’s been taking us.”

Judging by past actions, the Bank has shown itself to be capable of such decisive, drastic action when needed.

Governor Mervyn King told a parliamentary committee last week that: “We will take whatever action we feel is necessary on interest rates to steer the economy back into calmer waters. We may need to cut Bank Rate more than we would otherwise have done.”

Moneyfacts, a financial information service, has estimated that homeowners with a standard £150,000 repayment mortgage, could be saving anything between £19 – £75 per month, depending on how big the rate cuts actually are and if lenders will pass on the cuts in full.

John Charcol, mortgage advisors, has said that only 10 of 69 lenders have passes the last two mortgage rate cuts in full to their customers on standard variable rate mortgages.

Lloyds TSB, and therefore also Cheltenham & Gloucester, as the company also lends under this brand, have already promised to pass on reductions to borrowers on standard variable mortgages in full.

Customers on tracker deals however, may not see the full benefit of further Bank cuts in rates.

Some lenders have introduced a floor (also called a collar by some banks) which means that if interest rates fall below a certain point, the cuts will not be passed on to customers.

Mortgage rationing is set to become more of a problem in 2009 if the government don’t intervene, according to a lending group.

Director General of the Council of Mortgage Lenders (CML), Michael Coogan, has said there are now fewer lenders with less money. He also suggested that if lending levels in 2009 go in a similar way to 2008, they could be a challenge. And added that smaller companies may have to spend a third of their profits covering the bail-out of bigger banks.

Mr Coogan was speaking at the CML’s annual conference on Tuesday and painted a rather dull picture for people intending to get onto the property ladder in the near future. He said that: “Consumer borrowing will simply not return to the levels seen in 2007, even if funds increased and a wide variety of lenders were to become active in the mortgage market again.

“In fact, unless the government takes further targeted action to help market participants, we will see a worsening of the picture next year compared to this.

A good outcome next year in my view would be if we had lending at levels seen in 2008, but bearing in mind we will be in a recession…this would be a real challenge.”

Sir James Crosby also voiced similar views earlier this year, when in a recent report to the chancellor, he suggested that net new mortgage lending would pads the low of £15 billion in 1995 and fall below zero.

House prices in Britain have fallen by 10% to 15% this year so far. Mortgage approval is also down 74% compared to last year, and it is expected that there will be further falls in prices.

Mr Coogan also claimed that building societies would make a loss this year. Other small financial businesses are seeing their profits hindered by “unintended consequences” of moves to protect customers with failed banks.

Though the government may have made changes in order to avoid tax-payers having to cover compensation paid on those who have lost money with Icelandic banks, in actual fact, it will be financial institutions of all sizes that have to cover the cost via the annual financial services compensation scheme. This has cost some of the smaller institutions up to 30% of their annual profits.

Mr Coogan has however backed the mortgage lenders decision to delay the process of repossessions for borrowers in financial troubles. But he has also asked for more support from the government. He has proposed a “backstop scheme” in order to sell property to their lender which they could rent back. This would stop the need to go to court, as well as underpinning property prices, and allow people to stay in their own homes, therefore supporting the local community.

Prior to Thursday’s decision on interest rates, he also criticised the idea as “short-sighted and counterproductive”, claiming that this was pushing down interest rates offered to savers.

Jon Pain of the Financial Services Authority has warned lenders to keep to contractual rules when passing on cuts to customers, saying that any floor on tracker mortgages must be made clear in an initial mortgage contract.

At the same conference, Liberal Democrat Treasury spokesman, Vince Cable also said that there should be no return on reckless mortgage lending, claiming that: “the industry should now be exploring new products to restore faith in mortgage lending.”

Chancellor Alastair Darling has revealed that while he may be planning on cutting taxes in his budget, the government will also be borrowing record amounts in order to reduce the effects of repression as much as possible.

According to his pre-Budget report, high income homes will also face more tax, and National Insurance contributions are also set to rise across the board, as part of his “exceptional” measures in order to reduce the effects of recession next year.

Alcohol, tobacco and duty prices are set to rise enough to offset the VAT cut from 17.5% to 15%.

Conservative Chancellor, George Osborne, has accused the Labour party of trying to bring Britain “to the verge of bankruptcy” as the plans detailed in the pre-Budget plan will double national debt, which is set to reach £118 billion next year.

He has accused the government of creating a “huge unexploded tax bomb timed to go off at the time of the next economic recovery.” And also that Mr Darling had offered “temporary tax giveaways paid for by a lifetime of tax rises on the British people,” and that the UK had been “mortgaged to bail out the mistakes of the past.”

Liberal Democrat treasury spokesman, Vince Cable has also said that the government’s plans would not be enough to boost consumer spending, and that they would do better to “put money directly in the pockets of low paid workers by cutting their income tax.”

Mr Darling has also reduced the predicted growth of the economy for next year from 2.75%, to between -0.75% and -1.25%, the biggest downward revision recorded.

On the other hand, he has said that the government will inject either £20 billion or 1% of GDP into the economy in order to get things moving again, leading to an increase in government borrowing.

There is also expected to be a cutback in government spending, with the rise predicted to be at 1.2%, lower than in recent years.

The 2.5% VAT cut will come into effect on Monday, just in time for the peak in the Christmas shopping period, and will aim to put £12.5 billion back into the pockets of consumers over the 13months during which it will last.

Also, on top of their £10 bonus, pensioners will receive a one-off payment of between £60 and £120 in January.

The increase in duty on alcohol, tobacco etc however, will be permanent.

In measures that aim to try and get back some of the VAT that the government will be losing, top rate tax will increase to 45% in 2011 for people earning over £150,000 per annum from April 2011, and all National Insurance contributions for both employees and employers will be raised by 0.5%.

The starting line for National Insurance and income tax line will be brought into comparison with each other so that anyone earning less than £20,000 per year will not pay more contributions.

In defence of borrowing rate being almost double for next year than 2008, the Chancellor has said that “in these extraordinary circumstances allowing borrowing to rise is the right choice for the country. Taken together these steps will ensure money flowing into the economy when it is needed most, but we can reduce borrowing when growth returns.”

Other measures include speeding up the introduction of planned rises in child benefits, along with measures that aim to help small businesses struggling due to the credit crunch.

He has also announced that drivers will face a more gradual introduction of new vehicle excise duty, at only a £5 increase per vehicle next year.

And, of course, there was mention of work on motorways, schools and repair to council houses by bringing forward £3 billion of state spending.

Also for home owners, a scheme that covers mortgage interest payments for those that have lost their jobs will cover up to £200,000 of mortgages.

The other major change in order to try to boost the economy is that this year’s £120 income tax personal allowance per year for basic rate tax payers will stay and be increased to £145.