Speculation grows for interest rate cuts next year

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by Kay Murchie

According to research from the Building Societies Association (BSA), mortgage lending declined last month as slowing house prices and higher loan costs deterred buyers and sellers.

In addition, the Council of Mortgage Lenders (CML) said lending last month was £30.7 billion, down 8% compared with the same period last year.

These reports have generated speculation that there will be further interest rate cuts next year.

The housing figures will be of concern to the Bank of England. The pound has also fallen again below $2 which has led to the City speculating that this month’s interest rate cut will be followed by more in 2008.

According to the BSA, its members lent only £4.1 billion in home loans last month, compared with £4.6 billion in November 2006. Approvals for future house purchases fell from £4.4 billion to £4.2 billion.

Adrian Coles of the BSA said this cooling of activity since 2006 is likely to be a consequence of higher bank rates and a tightening of credit conditions.

Interest rates increased from 4.5% in August 2006 to 5.75% by July 2007, meaning homeowners are seeing their mortgage repayments rise each month. This month, the Bank of England reduced them to 5.5% earlier this month after it realised the severity of the crisis facing the housing market.The Bank admitted that the slowdown in the housing market seemed more pronounced than expected.

David Brown of Bear Stearns said it looked as if the Monetary Policy Committee ‘hit the panic button for lower rates’ as it realised how severe the deterioration was.

It is believed by many economists that the Bank will reduce interest rates 3 times in 2008 to 4.75%, with the first of the cuts coming as early as January or February.