Mortgage rates cut to 46-year low

Bank base rates in Britain were cut yesterday to their lowest level since January 1963 after the Bank of England responded to the looming threat of a full-blown global recession by reducing the cost of borrowing for the seventh time this year.

The half-point fall in interest rates to 4%, prompted by the economic fallout from the September 11 terrorist attacks, drew an immediate response from mortgage lenders. They trimmed the cost of home loans to levels last seen in 1955 as a means of propping up the flagging housing market.

Charcol, the mortgage broker, said the cut meant that someone with a ?100,000 interest-only mortgage who had benefited from all this year's reductions would now be paying ?166 a month less than in January - an annual saving of ?2,000.

Most of the leading mortgage lenders opted to pass on the full 0.5 percentage point cut to their borrowers. The monthly payment on a typical interest-only ?60,000 loan will fall by ?25 and the payments on a ?150,000 interest-only loan by ?62.50.

In a statement announcing its pre-emptive move, the Bank said the evidence suggested that the "global slowdown may be somewhat deeper and longer than previously thought." To prevent slower growth and weaker commodity prices leading to an undershoot of the government's 2.5% inflation target, the Bank said it needed a half-point cut in rates.

"In the UK, growth has so far remained close to trend," the Bank said. "But reflecting the changed world outlook, the latest surveys of confidence and business activity have weakened. Meanwhile, cost and price pressures are somewhat more subdued."

Both employers and unions welcomed the cut, which was in line with half-point reductions by the European central bank yesterday, and by the US federal reserve on Tuesday. Digby Jones, director general of the CBI, said: "This was the decisive move that business wanted to give our economy a much-needed shot in the arm."

With cheap money boosting consumer spending, the government believes there is a risk that a strong recovery in the US could lead to higher UK inflation next year, putting pressure on the Bank to increase lending rates. But Mr Jones said yesterday's reduction should not be seen as the "end of the road", and the Bank should stand ready to cut again if economic conditions continued to deteriorate. The CBI's latest surveys have shown that confidence, output and orders are all falling.

The chancellor, Gordon Brown, will give his assessment of the prospects for the economy in his pre-budget report on November 27.

The TUC general secretary, John Monks, said: "This is a very welcome cut, in line with our recommendation, which will help Britain escape the worst of the global downturn."

The Halifax, Nationwide, HSBC, Bank of Scotland, Virgin One and Intelligent Finance were quick to announce a 0.5% cut in their standard variable mortgage rates.

Halifax's "new" mortgage rate fell from 5.5% to 5%, while its "old" rate, paid by a sizeable number of its existing borrowers, was reduced from 6.25% to 5.75%.

Some lenders opted to pass on only part of the rate cut to their mortgage-holders, arguing that they had to balance the needs of borrowers and savers.

Abbey National and Cheltenham & Gloucester cut their standard variable rate by 0.4% to 6.1% and 5.95%.

The Council of Mortgage Lenders said the Bank's move "will help to mitigate the potential effects of a worsening outlook for consumer confidence and unemployment".