Mortgage cost relief as economy demands base rate cuts

Economists are forecasting relief for hard-pressed homeowners with predictions that interest rates will be cut three times during 2008.

The Bank of England’s latest quarterly inflation report raises concerns about a slowdown in the UK economy as a result of the US sub-prime mortgage crisis and the ensuing turmoil in the world’s financial markets.

Mervyn King, the Bank’s governor, has stated that there is a risk of a “bigger downturn” in the economy than previously expected.

This statement and other elements of the report have led analysts to believe that interest rates will start to come down in early 2008.

This will be necessary if economic growth is to receive a boost, and rates are expected to continue to fall into 2009.

Alan Clarke, economist at BNP Paribas, the French bank, sees the report as having “validated market expectations that we are going to see two or three interest cuts in 2008″.

Howard Archer, chief UK and European economist at Global Insight, the economic forecasting consultancy, says: “The report is markedly more doveish and indicates that at least two interest rate cuts are likely”.

Predictions of a significant downturn in the UK economy could mean that the base rate would be cut to 5%.

This would bring much needed relief to homeowners who have seen rates increase from 4.5% to 5.75%, since August 2006.

In some cases monthly mortgage bills have increased 40% because borrowers’ fixed-rate loans that have come to the end of their terms and they have been forced to remortgage at much higher rates.

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