Base Rate cut could be 1% tomorrow 03.12.2008

Author: David Whittaker Posted on: 03 December 2008

The original belief that the MPC would recommend a 0.5% cut in December has been overtaken by recent events. Early in November bad news on the state of the economy confirmed for many people that a cut of 0.5% in December was likely despite the fact that retails sales on the high street in October came in better than expected.

The minutes of the November MPC meeting suggested that they had considered cutting rates by 2% rather than the announced 1.5% but held back for fear of its impact on confidence in all markets. This was swiftly followed by the news last Wednesday that two large retailers, Woolworths and MFI had both gone into administration - and as Woolworths will continue to trade through to the new year with its 815 shops they will effectively seek to shift stock at any price with a big knock-on effect to other retail outlets. Demand for raw commodities such as oil and metals are still at very low prices which is good at one level but indicates there is a big contraction in many major economies of the world. 

3 month LIBOR stands at 3.84% continuing a steady downward trend but the real movement in SWAP rates with 1 year at 2.62% and 3 year at 3.07% is an indication that rates will reduce further and for a longer time than many originally thought. This means that the recession may last longer than the Government would have us all believe. On the plus side it will mean residential mortgage rates will continue to reduce and that fixed rate mortgage products starting with a "3" will become more common place. Buy to Let mortgage products will become more attractive in the coming weeks and rates with a "4" and less heavy fees will start to appear.

On 18 November my colleague Steve wrote on this blog that he predicted that Base Rate would reduce by 1% this month - and that was before the MPC report and many other indicators were available.......many have subsequently followed his lead. Only time will tell......