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Interest rates in Britain will drop to a new 50-year low in the coming months, economists say, as the Bank of England tries to head off a serious recession. The Bank’s monetary policy committee (MPC) is expected to start the process by cutting rates this week.

The predictions came as Gordon Brown, meeting European leaders in Paris, called for a new £12 billion fund to help small businesses through the crisis. The fund, an early drawing-down of the existing European Investment Bank budget, would “show how we can do more in Britain and across Europe to help small businesses, as well as households, through what is a difficult economic time,” he said.

Lady Vadera, the minister and former Brown adviser, is set to take on a more prominent small-business role under the new business secretary, Peter Mandelson.

Dominique Strauss-Kahn, managing director of the International Monetary Fund, said at the same meeting Europe had to do more to coordinate its response. “What counts above all is coordination and the will not to act each for himself,” he said. “The world economic situation is very worrying,” he added.

Read more at Times Online

Labels: Bank of England, UK Interest rates

The market seizure caused by the near-collapse of Bear Stearns, America's fifth-largest investment bank, forced Bank of England governor Mervyn King to announce the special liquidity scheme on April 21.

It was intended to encourage banks and building societies to lend to each other, which they had been reluctant to do as a result of the run on Northern Rock a year ago. The problem was that big financial groups had lost their ability to raise funds by packaging up mortgages into bonds.

These became toxic in the US sub-prime mortgage crisis that started last summer and forced Northern Rock to its knees.

Through the SLS, banks and building societies were able to swap mortgage-backed bonds and other unwanted assets for attractive government paper (nine-month Treasury bills). The idea was to inject more liquidity into financial markets and encourage banks to do business with each other.

Read the full article at Guardian property news

Labels: Bank of England, bear sterns, Mervyn King, northern rock, US sub prime mortgage crisis

The Bank of England governor, Mervyn King, yesterday warned the government not to try to artificially support the mortgage market as that could further prolong the year-long credit crunch. He also held out little immediate prospect of interest rate cuts to boost the flagging economy.

Appearing before parliament's cross-party Treasury committee, King said the Bank did not have the resources to underpin lending across the entire financial system and thereby boost mortgage lending.

The Treasury has commissioned Sir James Crosby to report on steps that could be taken to encourage more mortgage lending which could help prevent house prices from tumbling further.

King said there were only two choices for the government - either to let the Bank's special liquidity scheme (SLS) help the financial system gradually return to health, or to fund the mortgage market through a state-run bank.

Article continues at Guardian Online.

Labels: Bank of England, Mervyn King, Mortgage rates, property prices, uk housing

Mortgage rates have fallen back to the level they were before the credit crisis sent the price of home loans soaring last year.

The average interest rate on a two-year fixed-rate mortgage - the most popular deal taken out by home owners - has dropped from a peak of 7.08 per cent at the beginning of July to 6.39 per cent, according to Moneyfacts.co.uk, the financial website.

Two-year rates have not been this low since July 2007, before Northern Rock was forced to borrow £26 billion from the Bank of England and the phrase "credit crunch" entered everyday use.

The figures confirm that while the economy and the housing market continue to slide downwards, the worst seems to be over in the mortgage market.

It follows two months of steady rate-cutting from the UK's leading banks.

Read more at Telegraph Online

Labels: Bank of England, credit crunch, Mortgage lending, Mortgage rates, property prices, uk housing, uk mortgage market

In the past decade, home buyers have paid the government £32bn in stamp duty, with the annual amount rising dramatically as the housing market soared and increasing numbers of properties were caught by the tax.

According to the Halifax, just over a quarter of the privately-owned homes in the UK, more than 5.5m, were valued above £250,000 at the end of last year, the threshold at which stamp duty is levied at 3% of the property's value. In 2002, there were just 1.8m properties valued above £250,000.

A family buying the average-priced home in Greater London, currently £291,500, would pay the Treasury £8,745 in tax.

The government has enjoyed a large increase in revenue from stamp duty since Labour came to power in 1997. That year, the yield from residential properties was just £675m. Increases in the rate of tax combined with the impact of rising house prices meant the Treasury collected £6.4bn from stamp duty on homes last year. However, that figure will fall dramatically this year as the housing market has hit a wall and the number of transactions has plummeted to record lows.

Under the current regime, there are four stamp duty bands. Buyers of homes worth less than £125,000 pay nothing. Between £125,000 and £250,000, buyers pay 1% on the price of the home; between £250,000 and £500,000, buyers pay 3% of the price; and above £500,000, they pay 4%. There were 1m properties in the UK valued at more than £500,000 at the end of last year, a threefold increase in the past five years, according to the Halifax.

Consumer groups, mortgage lenders and house builders have lobbied for the lifting of the current thresholds to keep them in line with rising house prices, and those calls have become louder as the housing market has been paralysed by the credit crunch. First-time buyers are under particular pressure as the banks' lending criteria have become tougher and they are being forced to find much larger deposits.

If the higher stamp duty thresholds of £250,000 and £500,000 had increased in line with house price inflation since July 1997 when they were introduced, they would now stand at £720,000 and £1.44m, the Halifax said.

Read more at Guardian Economics

Labels: Alistair Darling, Bank of England, credit crunch, Gordon Brown, Halifax, House Tax, Mortgage rates, negative equity crisis, property analysis, Stamp duty changes, uk housing

Plenty has happened since the Bank of England last cut interest rates in April. Inflation has risen to 3.8% - almost double the government's 2% target - requiring the Bank's governor, Mervyn King, to write an explanatory letter to chancellor Alistair Darling. At the same time, the economy has weakened rapidly – today's news from the Halifax of an 11% drop in house prices over the past year is merely the latest evidence of a deflating property bubble.

Official figures suggest Britain continued to expand - if weakly - in the second quarter of the year, but all the signs are that the second half of the year will see the economy slide into its first recession in more than a decade and a half.

Against that backdrop, it was hardly surprising that the Bank's monetary policy committee left interest rates on hold today.

Article continues at Guardian news

Labels: Alistair Darling, Bank of England, chancellor, Halifax, Mervyn King, UK Interest rates, UK recession

The Bank of England held interest rates steady at 5% yesterday as it decided inflationary risks were too great to allow it to cut borrowing costs to boost the flagging economy.

The monetary policy committee's decision followed a flurry of gloomy data about the state of the economy in the UK and beyond, and appeared to be backed by a senior figure at the International Monetary Fund, who suggested global inflation is back and policymakers should act aggressively if things start to get out of hand.

John Lipsky, the IMF's deputy managing director, said in New York: "Signs of more general inflation pressures would justify a decisive policy response, lest the impressive gains in global stability attained in recent years be sacrificed."

There had been calls for the Bank to match last month's quarter-point cut and bring some relief to the struggling property market. Nicholas Leeming, of propertyfinder.com, was unhappy at the lack of action: "The Bank can't afford to wait another month before it acts again. Mortgage lenders have all but withdrawn from the market, leaving many homebuyers unable to qualify for financing and many unable to get it at a price they can afford.

"The housing market has come to a standstill but there's no shortage of buyers, just a shortage of mortgages, which is now impacting the wider economy. Inflation remains a threat, but further immediate intervention, as well as future rate cuts, is now essential to stimulate lending, the housing market and the economy."

The decision had been widely expected in the City, though some economists had expected the MPC to cut rates after a run of weak data from the dominant services sector, the manufacturing sector, the housing market and the retail sector.

David Kern, economic adviser to the British Chambers of Commerce, said he was disappointed the MPC had not cut rates. "We believe this decision was a mistake given the serious threats to economic growth. The MPC has missed a valuable opportunity to underpin business and consumer confidence and to limit the potential damage to the economy."

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said that slowing economic activity was the most pressing issue for the authorities. "Housing transactions have collapsed, consumer confidence has sunk to its lowest level since 1992, the service sector appears close to stagnation according to the latest CIPS survey and the retail sector is under immense pressure."

With mortgage approvals down nearly to half what they were a year ago and housebuilders' reservations having tumbled by two-thirds, economists are concerned that falling house prices and tumbling consumer confidence could lead to a slump in consumer spending, which accounts for two thirds of the economy.

Latest estimates suggest the economy has slowed to well below its long-term average growth rate and is likely to slow further. However, the MPC is conscious that inflation is above its 2% target and likely to rise in the coming months.

Lipsky said inflation concerns have resurfaced even as global growth slows. "The effects of the slowdown are being felt most keenly in the US, but growth in all regions of the world is slowing," he said.

The IMF remains optimistic that the world will not experience a return to a 1970s-style inflation spiral, although the risk of such an outcome could not be dismissed, Lipsky added.

Oil prices hit a fresh high of $123.93 on Wednesday and the AA is releasing figures today showing the cost of motoring has risen 11.5% over the past year.

The government will announce measures today to help homeowners facing difficulties with repaying their mortgages.

The European Central Bank left eurozone interest rates at 4%. The ECB faces higher inflation than in Britain so is even more reluctant to cut borrowing costs.

Full story posted here.

Labels: Bank of England, ECB, Housing market, IMF, MPC, property prices, RICS, UK Interest rates

RECENT DAYS have witnessed some extraordinary developments, most of them from the Bank of England. Time was when months would go by without a peep from the Old Lady. Now it has become a news-generating machine that Max Clifford would be proud of.

Development one was Mervyn King’s attack on the City’s reward culture, which many will applaud, though some would say a bit of performance-related incentive is a good thing. The governor’s salary of just under £282,000 — small in relation to many City salaries though with a pension pot of nearly £4m — rises 2% a year, come what may. That gives him an incentive to keep inflation on target but doesn’t reward or punish him beyond that.

Development two was a speech by David “Danny” Blanchflower, one of King’s colleagues on the Bank’s monetary policy committee (MPC). This was, it is safe to say, the most doom-laden speech ever from a UK policymaker, warning that Britain was likely to follow America into recession (whether the US is in recession is still open for debate after first-quarter numbers showed growth), that a fall in house prices of a third in two to three years “does not seem implausible” and the risk of something “horrible” arising from the credit crunch was significant.

Compared with the coded language normally adopted by anybody with anything to do with the Bank, this was a revelation. Blanchflower spends half his time in America and that may explain his gloom, but even there central bankers are a bit more guarded in their language. I am surprised this one got past the censors.

“Developments in the UK are starting to look eerily similar to those in the US six months or so ago,” he said. “There has been no decoupling of the two economies: contagion is in the air. The US sneezed and the UK is rapidly catching its cold.” I’ll return to that.

Development three, hard on the heels of this blood-curdling warning, was the apparent declaration from the Bank that the credit crisis was over and that banks should come out of their shells and start lending again.

This was not quite what its financial stability report was saying: that some gloom in financial markets may have been overdone, in that the scale of losses assumed in US sub-prime assets, a 40% default, looks too pessimistic. Financial markets are assuming many such assets are worth nothing, while on conservative assumptions, and allowing for further falls in American house prices, they are worth something.

Article continues at TimesOnline

Labels: Bank of England, House market, Mervyn King, property boom