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Prospect of Cheaper Loans
The next 10 days could see some big changes in interest rates on both sides of the Atlantic and if the expected cuts come to fruition cheaper loans and mortgages are likely to follow.
The US central bank is meeting over the next two days and is expected to announce further interest rate cuts, despite their shock three quarter point cut last week aimed at stalling a downward spiral in world equity markets. If they announce the talked-about 0.5% cut that will mean US rates on borrowing would have fallen from 4.25% to 3% in the space of just over a week. That's a staggering 40% fall.
Then, next week, the equivalent group meets in the UK to decide on borrowing charges closer to home.
When the Monetary Policy Committee decided to reduce rates in December 2007 it was only their second unanimous decision since August 2004 when rates reached a 4.75% peak where they would remain for a whole year before dropping back to 4.5% for the whole of the next year. But since August 2006 rates experienced a steady climb that only fell back with the rate cut announced in December 2007. Over that period loans and mortgages have been getting steadily more exoensive and contributing to recession fears and worries about property prices.
Because of the large cuts made in the US last week, many observers are expecting another unanimous decision for a rate reduction in the UK, but by how much?
Certainly a cut would be another welcome shot in the arm for the property market which has virtually stalled on warnings of possible house price reductions.
The other factor is the welcome boost it would bring to the struggling UK loans industry. Over the past 6 months many loan providers have struggled to operate in the worsening wholesale credit environment, with acceptance criteria for loans in constant change and many lenders finding it difficult to arrange funding for their product portfolios. Cheaper interest rates will certainly help the prospect of cheaper loans to follow.
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