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Tuesday, May 6, 2008

Will interest rates be cut this month?

We have endured another month of liquidity problems in the global market which still 8 months on, shows little sign of abating. There is still a lack of confidence that banks have about lending to each other.

There is still a funding gap between the base rate and London Interbank Offered Rate (LIBOR) which continues to drive mortgage pricing.

It still remains to be seen whether the Special Liquidity Scheme will be effective in restoring confidence in financial institutions.

Inflation has held steady at 2.5% in March (or at least that is what we are being told!), however the impact is being felt in rising costs of food and fuel. If rates are cut to quickly we could end up going back to the days of seventies style inflation - which is very difficult to bring back in line.

The worrying factor is that UK Gross Domestic Product (GDP) growth is slowing. It is likely to be between 1.55 and 1.8% this year, and confidence among consumers is also down.

So, should the Bank of England Monetary Policy cut interest rates this month?

Our view is no. They should hold rates to see if the Bank of England's scheme yields some benefit and also monitor inflation.

If you have any questions on this article or others like it, please feel free to contact Solution Mortgages on 0845 123 1260, or visit us online at www.solution-mortgages.co.uk