Homeowners can look forward to interest rate cuts next year

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by Kay Murchie

City economists have predicted 3 cuts in interest rates in 2008 which will no doubt be good news to homeowners struggling with mortgage repayments.

In its quarterly Inflation Report, the Bank of England said it had become more concerned about the slowing pace of the economy following the turmoil in the world’s credit markets, comments that analysts have said point to lower interest rates.

Since summer 2006, interest rates have risen from 4.5% to 5.75% and many homeowners have faced large increase in their monthly mortgage repayments of up to 40% after discounted fixed-rate deals expired.

The Bank of England’s Governor, Mervyn King, said there was a threat of a bigger downturn than previously anticipated after the global credit squeeze sparked by the meltdown in the US sub-prime mortgage market.

The City interpreted the report as a hint that interest rates will start to come down in early 2008 to boost economic growth and will continue to fall into 2009.

An economist at BNP Paribas expects 2 or 3 interest rate cuts next year whereas Global Insight predicts at least 2 interest rate cuts. Several other economists are expecting that the first 0.25% cut will come as early as February. An economist at Capital Economics said November’s Inflation Report gives a clear signal that a series of interest rate cuts are in store.