Bank of England leaves interest rates on hold

By Edmund Conway
The Telegraph, London
Friday, October 5, 2007

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/05/cnboe1...

The Bank of England has left UK interest rates on hold, despite falling house prices and thousands of families seeing mortgage rates soar.

The Monetary Policy Committee said it was leaving borrowing costs at 5.75 percent in October, but experts predicted it may cut rates next month as the credit crunch and woes in the UK banking sector take their toll on the economy.

The decision came amid news the record household debt burden is weighing even more heavily on British families. Abbey, the country's second-biggest mortgage lender, announced it was increasing the interest charged on its 100 percent first-time buyer tracker mortgage by a substantial 0.45 of a percentage point to 6.99 percent, while the rate of its discount two-year variable tracker was being raised by 0.1 of a percentage point to between 5.79 percent and 5.94 percent.

Meanwhile, research by Richard Jeffrey at Ingenious Securities showed that households' interest payments are likely to be 26 percent higher in the final quarter of 2007.

This is the latest evidence that the recent liquidity crunch in the City's money markets is now resulting in higher costs for families around the UK. Economists said it was a bad omen for the wider economy in the coming months as Britain's prosperity in recent years has been largely powered by the consumer sector, with much spending funded by debt.

If, as many expect, consumers stop spending when borrowing becomes too expensive, it will cause overall economic growth to drop significantly.

Halifax announced that house prices dropped by 0.6 percent last month -- the first fall it has detected so far this year. While the annual rate remains relatively high at 10.7 percent, the group said the housing market was in the midst of a slowdown.

House prices are now falling sharply in some parts of the country. In the North, prices dropped by 2.1 percent over the past quarter, Halifax said, while in Northern Ireland prices fell by 3.2 percent in the same period. However, the London boom continued, with prices rising by 2.3 percent in the second quarter.

Howard Archer, chief UK and European economist at Global Insight, said: "Even allowing for the fact that house prices often show significant swings on a month-to-month basis, the Halifax report is quite an eye-opener.

Evidence is mounting that the housing market is now cooling markedly in the face of the financial market turmoil and the increasing affordability pressure on house buyers coming from higher interest rates, elevated house prices and modest real disposable income growth."

One in three economists questioned by Reuters predicted house prices would fall on an annual basis next year, and analysts dramatically scaled back their forecasts for price growth.

Conservative Treasury spokesman Philip Hammond said: "Millions of hard-working families are feeling the pinch as the effects of higher interest rates begin to bite and their pay packets are plundered by Gordon Brown's stealth taxes."

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