 |  | By Amy Rich Staff Writer Wednesday, 9 April 2008 |
Interest Rates Set to Fall
Credit Crisis Jargon Buster
Credit Crisis - caused by a combination of elements: sudden drop in market prices of assets / reduction in loan availability / change in monetary factors (interest and inflation rates).
GDP – Gross Domestic Product: the total market value of all goods and services produced within a country over a period of time (usually a calendar year).
Inflation - A sustained increase in costs of goods and services in an economy.
Global Insight - The global leader in financial and economic analysis – in existence for over 40 years.
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BRITAIN is in the midst of a major credit crisis, and there’s no light at the end of the tunnel according to leading figures in the financial industry. But are interest rates really going to drop to 4% - and if they are, how long will this crash last and what does it mean for you?
Financial turmoil
The Bank of England has acknowledged that Britain is facing financial turmoil, and Governor, Mervyn King states that it has, moved to a new and difficult phase. Interest rates are set to fall with some analysts predicting it will reach 4% in the first half of 2009
5% interest rate by April
The UK will not, however, see such a dramatic fall in rates as the USA – which has recently seen rates slashed from 5.25% to 2.25%.
The Bank of England has cut rates from 5.75% to 5.25% since December. Howard Archer, economist and forecaster at leading independent financial analysis firm Global Insight, says he expects the Bank of England to cut base rates again by a further 25 base points to 5% in April.
The interest rate cuts will be progressive - hopefully lessening the shock factor.
But it’s definitely time to buckle up for a bumpy ride as interest rates fall and inflation rates rise.
In response to worsening interest rates, banks and building societies are becoming reluctant to lend money quite so willingly – making it harder for potential property buyers to get a mortgage.
Banks keeping their money strings tight
Banks are overly wary on lending money on properties which will most likely fall in price.
Loans for the full purchase prices have been cut by all major UK lenders and down-payments of at least 5% are required. Over the past few years, home-owners have basked in the glory of rising property prices but that’s all set to change.
Property prices are slowing and March alone saw a drop of 2.5% - the biggest monthly drop since 1992.
Mervyn King acknowledged that inflation is also a major issue.
The inflation rate target is 2% - but already in February it has hit 2.5% and is quickly heading towards 3%.
Prime Minister Gordon Brown spoke on BBC TV about his dedication to helping the people that this credit crisis will hit the most:
"We will keep looking to see what we can do to be on the side of the home owners and home buyers and also of course businesses seeking funds for investment."
With words from the top, it’s certain things are going to get bleak. But for how long?
UK to avoid recession
Howard Archer predicts that the GDP growth will be the worst since 1992.
“We forecast GDP growth to be limited to 1.8% in both 2008 and 2009, which would be the equal weakest performance since 1992. However, with the downside risks to the UK economy mounting, there is clearly a very real possibility that interest rates will fall faster than this,” he said.
"We currently forecast interest rates to fall to 4.5% by the end of 2008 and to 4% in the first half of 2009. This is based on our assumption that the United Kingdom will avoid recession, but will see extended below-trend growth” added Mr Archer.
Borrowers and Tracker Mortgage-holders are the winners
Falling interest rates can be both good and bad news depending on your situation. If you’re a borrower or have a tracker mortgage – it’s great news.
If you’re trying to accrue a nice little pot of cash from your savings – it’s not such good news.
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