December’s decision was possibly the most speculated one the country has seen since rates began to steadily rise in August 2006. It is only the second time that the MPC has reduced rates in December since 1997.
Initially, the prospect of a rate cut so close to the year-end had been thrown out by industry commentators who feared that consumers would overspend in a knee-jerk reaction to such a move.
However when the fresh statistics of the past fortnight began to paint a far more doom-laden picture of a struggling economy, the industry did an about-face, with the CML and IMLA amongst those calling for a cut.
With Halifax reporting that house prices fell for the third consecutive month – the first time the three-month barrier had been breached since 1995 – and Nationwide research showing consumer confidence dropping at the sharpest rate in a month since its records began, these calls were certainly not unfounded.
Property for Life went slightly further and called for a cut of 0.5 per cent to get the ball rolling, however the historically cautious MPC were only willing to go as far as 0.25 per cent.
The breathing space that this now affords borrowers will see their monthly mortgage repayments cut to just over £921 on a standard £150,000 loan over 25 years from the current £943. If the cut had extended a further quarter point then this would have dropped even further to just under £899.
The Bank voted 7-2 in favour of a rate freeze in November, however in the weeks since, MPC member David Blanchflower had indicated that a reduction was on the cards.
REACTION
The rate cut has been called "controversial" by Hamptons International Mortgages' managing director, Jonathan Cornell who has suggested that the final decision could well have been met with some resistance.
“There were clear arguments from both camps," he said. "Inflation, while nowhere near the dizzy heights of 3.1 per cent seen in March this year, is continuing to creep upward.
"While a rate cut may inject some needed liquidity into the market there are risks that increased spending and borrowing could further ignite inflationary pressures."
However, Cornell said this reduction had only been a 'token' gesture, suggesting that only when rates drop further will borrowers be able to feel anywhere near comfortable again.
CML director general, Michael Coogan said: "This will reduce the risk of payment shock for the 1.4 million borrowers coming off fixed rates in the next year. However, we still need the authorities to intervene more aggressively to open wholesale funding markets. There is a real need to minimise the shortfall between the demand for mortgages and lenders' capacity to supply them."
BSA director general Adrian Coles added: “Today’s rate cut indicates that the MPC believe the ongoing fragility of the credit markets is likely to affect on the wider economy in the future."
Whilst pleased at the decision to finally give borrowers a bit of slack, David Kuo, head of personal finance at Fool.co.uk, said that borrowers should not overlook the ongoing issue of rising inflation.
He advised: “Consumers should not look a gift horse in the mouth, but nor should we follow its lead. Inflation remains a real threat, and it’s worth bearing in mind that what the central bank gives with one hand it can easily take back with the other – at any time.
“Homeowners on tracker-rate mortgages will see an immediate reduction in their monthly repayments. But they should capitalise on the rate cut by maintaining repayments at the previous level."
