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Interest rate cuts may not boost property market

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by Gill Montia

Mortgage borrowers will have felt relief at last week’s cut in the Bank of England’s base rate, to 5.5%, which as been followed by forecasts that interest rates are now set to continue falling, possibly decreasing to 4% or below by 2009.

However, the reasoning behind the predicted slide in borrowing costs casts a shadow because it is based on the expectation that the Bank will have to act further to prevent the economy falling into recession.

Further cuts in the base rate could be in response to a downturn in both the housing market and high street spending.

The housing market now seems certain to stagnate in the coming year and could also see prices falling.

While some analysts are pointing out that this would be no bad thing, as a period of price correction is long overdue, both borrowing and lending will be curtailed as confidence in the housing market wanes.

At the same time, household incomes will continue to be stretched by rising fuel and food prices and the burden of past interest rate increases.

In this scenario any recovery in the housing market could be some way off as interest rate cuts will not altogether solve confidence and affordability issues.

In December 2003, the base rate stood at 3.75%. The Bank of England had lowered rates to offset a downturn in the economy.

The strategy was successful but resulted in a large increase in personal debt, which is now estimated at £1.4 trillion, and with the possibility of house prices falling many households will, on this occasion, be wary of increasing their borrowing.

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News posted: December 10, 2007

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