In an emergency session, the Bank of England, the EBC and the Federal Reserve in the US have moved to cut rates immediately by 50 basis points. The coordinated moves are aimed at counterbalancing the vicious deterioration in financial markets and giving some measure of reassurance to households.
This is the first half-point cut and first emergency reduction in the UK since 9/11. Paul Guest, Head of EMEA Research at Jones Lang LaSalle says: ‘They could not have done anything else. The downturn will now be longer and deeper than previously expected, to the extent that the MPC believes it will be sharp enough to bring inflation back down to the 2% target in the medium term from its current elevated level.’
New loans approvals are now at a record low, down 70% from a year ago and way down from the 130,000 peak in November 2006.
Some of the biggest lenders have raised mortgage rates amid turmoil in financial markets. Lloyds TSB has pushed up the cost of its two- and three-year fixed rate deals and Northern Rock has raised the cost of its entire range of residential fixed and tracker rate deals.
According to James Thomas, Head of Residential at Jones Lang LaSalle, ‘In the short term, this cut to base rates is little more than a sop to restore confidence. Libor rates will remain high as banks continue to work through the deleveraging process.
‘The crisis that is rocking global financial markets means conditions for potential homebuyers will remain difficult. Potential buyers are reluctant to commit themselves to new mortgages, even when they are able to secure them. Rising unemployment and the financial crisis is creating uncertainty about job security, while at the same time house prices continue to fall.’
House prices were 12% lower in September compared to the same time last year and down 1.7% over the month according to Nationwide. The only sign of respite is that the monthly rate of fall has stabilized over the last three months, suggesting that the pace of decline is not accelerating at least.