Rate cut hopes rise

Homeowners were hoping for a boost this week as speculation mounted that the Bank of England would take the cost of borrowing to a 47-year low.

Interest rates have been left on hold at 4% for the last year as the house market and consumer demand offset weaknesses elsewhere in the economy. But the City is divided over what the Bank's next move will be.

Last month, three members of the nine-strong Monetary Policy Committee (MPC) voted for a cut as concerns about the weak global recovery dominated.

A number of industry bodies are also looking for a reduction as the UK's hard-pressed manufacturing sector continues to struggle.

Should the MPC announce a cut on Thursday, when the results of its two-day meeting are unveiled, it will also be a boost for homeowners.

A quarter-point trim will take rates to their lowest level since January 1955, when they were 3.5%, and monthly repayments on an average mortgage will fall by more than ?9.

But it would also fuel fears that house price inflation will soar out of control while consumers become burdened down with debt.

HSBC economist John Butler does not believe interest rates should be cut. "In our view, UK rate cuts would do little to boost global demand and may actually be counter-productive in terms of destabilising the property market."

But Mr Butler added that the US Federal Reserve's decision about rates, due on Wednesday, will be crucial.

He said: "If the Fed cuts rates by 50 basis points, as we expect, this would be taken by the MPC as a major signal about the state of the US economy. It will probably push them over the edge and make them willing to take a massive gamble with the domestic economy. In that case, the MPC would probably cut by 25 basis points."

Investec economist Philip Shaw said of the three banks meeting this week - the Fed, Bank of England and European Central Bank - the first two were likely to trim rates by 0.25% each.

But Ian McCafferty, CBI chief economist, said: "The Bank has a difficult balancing act to perform, with factors such as a manufacturing recession on one hand and consumer credit concerns on the other.

"That is why business is not pressing for an urgent cut now. Companies want long-term stability and would not thank the Bank if a rate cut was made and then swiftly reversed.

"But if general economic conditions significantly deteriorate, CBI members would look for a decisive cut of half a percentage point."

David Buik, at City bookies Cantor Index, believes a cut will be unlikely.

He said: "Mortgage borrowing is marching on and consumer borrowing also shows little sign of abating. A 0.25% cut could exacerbate this trend, something the MPC will seek to avoid."

Rates were slashed to 38-year lows in 2001 as the Bank moved to ward off the global downturn.

They have been left on hold as conditions start to improve but concerns are now growing that the consumer boom is faltering and the US recovery is taking longer than expected. Tough equity markets and the possibility of war are also issues.