Bank tipped to cut interest rates

The Bank last cut rates in February Is 2% cut a good idea?

The Bank of England's Monetary Policy Committee (MPC) is expected to cut interest rates as the global credit crunch continues to unsettle the UK.

Analysts expect the MPC to announce that it will trim rates to 5% from 5.25% at midday on Thursday.

Such a move would be the third cut in interest rates since early December.

But the credit crisis, which makes funding mortgages more expensive for banks, may mean they do not pass on the full reduction to borrowers.

Homeowners on variable rate mortgages expecting to benefit from any cut could be disappointed, industry experts say.

"I don't think we can be sure that lenders will follow any cut in base rates," David Anderson, chief executive of Co-op Financial Services said.

"Lenders are funding mortgages from money markets and money markets are not always following reductions in the base rate. Therefore they may not be able to pass on any cut," he told the BBC.

Funding problems

Due to the uncertainty in the financial markets and a shortage of funds caused by the global credit crisis, the rate at which banks lend to each other has remained high.

Many mortgage lenders have had to withdraw their most competitive deals in recent weeks.

Renewed problems in the money markets and the recent dire news on house prices will carry greater weight than inflation concerns Capital Economics

However, the UK's biggest bank, HSBC - which relies less on the markets to fund its mortgages - bucked the trend when it said on Wednesday it would match some homeowners' fixed-rate deals.

Analysts said data showing falling house prices will drive the Bank of England's decision, despite inflationary pressures.

"We think that the renewed problems in the money markets and the recent dire news on house prices will carry greater weight than inflation concerns at today's meeting," Capital Economics said.

The Halifax, the UK's largest lender, said on Tuesday that house prices fell by 2.5% in March, the biggest monthly decline since September 1992.

Meanwhile the Council of Mortgage Lenders said the number of mortgages taken out in February fell to 49,000, the fourth consecutive monthly decline.

Pricing pressures

MPC members will also have to take account of the fact that inflation remains above the government's target of 2%, with energy and food prices rising.

The most recent available data showed that Consumer Prices Index inflation was 2.5% in February, up from 2.2% in January.

But the International Monetary Fund said on Wednesday that it expected slower economic growth in the UK to reduce inflation, confirming expectations of further rate cuts.

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