Aside from a certain former banking executive and his pension, the main discussion this week has seen many people in the industry and financial world talking about whether they would or they wouldn’t.

The answer came to light about an hour ago. They did.

The Bank of England’s Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.5 percentage points to 0.5%, and to undertake a programme of asset purchases of £75 billion financed by the issuance of central bank reserves. Never before have we seen a rate this low which was also accompanied with the news that the BOE would be pumping more money in to the country to help increase spending.

The statement from the Bank Of England website read:

“At its March meeting, the Committee noted that the February Inflation Report had implied a substantial risk of undershooting the 2% CPI inflation target in the medium term and that a further easing in monetary policy was likely to be needed.  Data released since the finalisation of the Report had not materially altered that prospect.  Accordingly, the Committee concluded that a further easing in the stance of monetary policy was warranted.  But the Committee also noted that a very low level of Bank Rate could have counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system.  On balance, the Committee decided to reduce Bank Rate by 0.5 percentage points, to 0.5%.

The Committee judged that this reduction in Bank Rate would by itself still leave a substantial risk of undershooting the 2% CPI inflation target in the medium term.  Accordingly, the Committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending to a level consistent with meeting the inflation target in the medium term.”

Like a boxing match, you will have two corners today, one of which will be dancing around the ring with their hands in the air, and the other who is sat on the stool with a feeling of a sharp kick in the stomach. If you have a tracker mortgage, today’s news will leave you feeling pleased, if not ecstatic, but if you rely on or have savings accounts, things are not looking so rosy.

So, when you go down the pub tonight, the people smiling have a mortgage, the people with half a pint, a gloomy look and possibly the hint of a tear in their eye have simply been doing what we have always been told to do, saving their money in a bank or savings account.

New statistics were published today by the Council of Mortgage Lenders on mortgage arrears and possessions. Unsurprisingly, full year figures for 2008 show a sharp rise on 2007, but many steps are being taken to help borrowers facing difficulty. Interestingly, there were 5,000 fewer repossessions than expected and were forecast in the previous year, with the measures that were introduced towards the end of year seemingly having some kind of effect.

A few stats and figures released by the CML today:

* 5,000 fewer repossessions than forecast in 2008
* 40,000 repossessions in the year - 1 in 290 mortgages
* 10,400 repossessions in the fourth quarter - 1 in 1,100 mortgages
* 1 in 64 mortgages in arrears of 2.5% or more
* 1 in 53 mortgages in arrears of three months or more (inflated by lower interest rates)
* 75,000 repossessions forecast for 2009 remains unchanged.

Around 10,400 properties were taken into possession by first charge mortgage lenders in the fourth quarter of 2008, down from 11,100 in the previous quarter but up from 6,900 in the fourth quarter of 2007, according to the Council of Mortgage Lenders. The total number of first-charge repossessions in the year was an estimated 40,000. This was 5,000 lower than the CML’s original forecast for the year.

The fact that there were 11% fewer repossessions than expected, despite a worsening economy and rising unemployment, demonstrates that mortgage lenders are making strenuous efforts to ensure that repossession really is a last resort. It is important to recognise that repossessions include a proportion of abandoned properties and property fraud. They also include buy-to-let repossessions, as well as home-owner repossessions. In the vast majority of cases where home-owners are committed to working with their lender to keep their home, this outcome is successfully achieved.

At the end of 2008, around 182,600 mortgages - or 1.57% of the total - had accumulated arrears equivalent to 2.5% or more of the outstanding balance  - for example, £2,500 or more on a £100,000 balance (a £97,500 mortgage plus £2,500 arrears). This compares with 1.29% at the end of the third quarter of 2008, and 1.08% at the end of 2007.

On a “number of months” basis, 219,100 mortgages were in arrears of more than three months at the end of 2008, up from 166,600 at the end of the third quarter of the year, and up from 127,500 at the end of 2007. However, the big reduction in mortgage rates experienced in 2008 was a significant influence on the rise in the number of arrears cases measured on a “number of months” basis - as the same given sum of arrears represents a higher number of months payments as interest rates fall.

The vast majority of people who face temporary difficulties successfully work with their lender to stay in their homes, and get their mortgage back on track over time. Where borrowers contact their lender early, maintain good communication and are committed to paying what they can and resolving their arrears, lenders work hard to help wherever the household’s future prospects look feasible.

Source – CML Press Releases

Another day, another rate cut…or so it seems at the moment.

Who would have thought 12 months ago that we would be in this position now? Economic measures are known to take a while to affect the economy, but with lending remaining tight, many believe it is not and will not be the required dose. However, with the intriguing news that house prices have surprisingly risen in January, are rate cuts the answer or should we really try something different?

Well, to answer the property surprise, it is likely that falling prices are more to do with renewed demand than a drop in rates.

Why? Well it is clear that the lower prices mean the market is now reachable for a new generation of first time buyers still eager to own their own home now they can afford to. That and the fact that successful Buy-to-Let investors are taking advantage of the value on offer are the key reasons. With interest rate cuts not being passed on by the lenders, this cannot be the overruling factor.

With the UK making a strong case for being bankrupt right now, the argument must therefore turn to other avenues for increased liquidity.

My argument is a simple one borne from experience in selling international property investment. There are plenty of people out there with surplus funds looking for something to do with them. Nothing they turn their attention to seems to work today. In today’s climate the area of funding may be the answer.

Therefore, I propose that Co-Op funding groups are formed (not fund run) to offer alternatives to institutional funding. Businesses which work in downtime growth markets making good margin but in need of quality funding are the natural avenues to pursue.

This why businesses that should survive and are well-run can benefit from the community and benefit the community with its produce; it’s win-win basically. We managed to put together a similar project for an ambulance stockist as many of you will know, with excellent results.

The idea is not new and has been used successfully through the centuries. So why not try it again? We’re all after a sense of community and forming these groups could significantly help local businesses and local economies get on their feet again. Co-op funders could be venturing with groups finding growth markets in a recession to ensure funding was funnelled in the right directions, maximising job potential.

It’s time to stop moaning about lack of tools to change the situation and start coming up with solutions. Just a thought…

After 11 months of continual house price falls, it would seem the run is finally over, at least according to one leading bank.

According to the Halifax, the price of UK homes rose by 1.9% in January, and data based on mortgage approvals showed that the average house price reached £163,966.

A quote on the BBC website reads:

“There are some very early signs that market activity may be stabilising, albeit at quite a low level,” said Halifax chief economist Martin Ellis.

“Nonetheless, continuing pressures on incomes, rising unemployment and the negative impact of the dislocation of the financial markets on the availability of mortgage finance are expected to mean that 2009 will be a difficult year for the housing market.”

Although this news is somewhat unexpected, it does contradict the survey released from Nationwide last week which reported prices had in fact fallen by 1.3%, so really it is up to you who to believe. But when more banks and mortgage companies release their figures, we will be in a better position to know the more accurate standings. Even so, it is great news that house prices are now starting to rise again, which could indicate the prices have fallen as far as they are going to go, something we are all hoping for.

In other news today, the Bank of England is expected to cut the interest rates again, with most predicting another 0.5% cut, taking the rates down to an amazing 1%, great news for those of us on tracker mortgages. The news will come later this afternoon, with our Managing Director Chris Davidson offering his view on whatever the conclusions may be tomorrow.

The forthcoming cut is not so welcomed by some business groups, based on the fact previous reductions have failed to help; they do not want to see another cut today. They would rather the bank increase lending, which to many small and medium businesses is a very valid point to be making. The Federation of Small Businesses (FSB) is one of the business groups saying it would prefer rates to stay on hold for February, according to the BBC.

So, house prices up and interest rates down, many will begin to ask the question this morning, is the recession beginning to ease, or have we just had a good month ahead of even worse times to come. A pessimist or an optimist will provide different thoughts, opinions and conclusions, but if the report is accurate, it really is a great month to be buying property as you might not get a chance to get it much cheaper.

Don’t forget to check out our latest BMV property deal by clicking here, we only have this one unit left, which we expect to sell today.

Trading is volatile this morning ahead of the Bank of England and ECB interest rate decisions due this afternoon. US unemployment figures have risen by over 500,000 in January alone and shares in Europe’s major banks have declined as Swiss Re and Deutsche Bank have reported massive profit losses for 2008.

Pound Sterling - UK markets

Sterling is trading at 1.44 against the US Dollar and 1.12 versus the Euro having strengthened ahead of the Bank of England interest rate decision.

The Bank of England is expected to cut the base rate to a new historic low of 1% this afternoon. The MPC decision will be weighed against Britain’s plunging inflation rates, thousands of jobs losses and increasingly grim economic climate. The NISER predicted a -2.7% contraction for the UK economy and the IMF has claimed Britain will be one of the worst hit by the current recession. While significant monetary easing has been undertaken alongside rate reductions, in future the Bank will have to look to increasingly unconventional policy measures. Icelandic investment group Baugur has become the latest high profile victim of the credit crunch after filing for bankruptcy protection yesterday. Baugur owns shares in high street giants Hamley’s, Iceland and House of Fraser and is expected to fold with debts of over £1 billion. The rate decision is to be announced at noon and is likely to be a source of volatility for the Pound.

US Dollar - US Markets

The Dollar has remained largely unchanged overnight, down against the Pound and Australasian currencies this morning.

Equities suffered yesterday after it was revealed the US private sector slashed 522,000 jobs in January. Today a series of soft data is released in the US but markets are likely to be dominated by events in the UK and Europe. The US unemployment rate and non-farm pay roll figures are out tomorrow.

Euro – European Markets

The Euro is down to 1.28 versus the US Dollar and 0.88 against the Pound as current exchange rates reflect uncertainty surrounding the ECB decision.

Last month ECB President Trichet signalled rates would not be cut further until March although falling inflation and rising unemployment in the Eurozone are mounting pressure on the ECB to act. EMU retail sales announced yesterday have fallen flat, showing a -1.6% contraction for the year to December. Deutsche bank has suffered its first annual loss, posting a €3.9 billion write down for 2008 and Swiss Re has gained a £1.8 billion cash injection from investor Warren Buffett. This news led to a negative day for European equities yesterday from which they have still not recovered. Norway’s national bank has cut interest rates to 2.5%. The ECB decision is this afternoon to be followed by a speech from President Trichet.

Other Currencies - Highlights

The Australasian currencies suffered overnight as worse than expected employment figures in the US triggered a round of panic selling. The New Zealand unemployment rate has risen to 4.6% as global recession is taking its toll on the minor economies through a downturn in tourism, trade and international investment. A monetary policy statement from the Reserve Bank of Australia is due tomorrow and this is likely to include scope for further interest rate reductions and government cash injections. Qantas shares fell 18% in trading yesterday as the outlook for tourism figures remained bleak.

Although interest rates are a funny old thing, sometimes good for us and sometimes not so, they play a vital and pivotal part of the UK’s financial stability and are used to try to control the economy.

According to Wikipedia :

“An interest rate is the price a borrower pays for the use of money they do not own, and the return a lender receives for deferring the use of funds, by lending it to the borrower. Interest rates are normally expressed as a percentage rate over the period of one year.

Interest rates targets are also a vital tool of monetary policy and are used to control variables like investment, inflation, and unemployment.”

History of Interest Rates

In the 17th Century, The Bank Of England was set up by William of Orange and proceeded to loan the Government of the time around one million pounds to help rebuild the country and help to finance wars and missions overseas. The early days of Interest Rates rarely saw any movement, with rates moving only twice in the 18th Century, moving lower and then increasing towards the end.

1840 saw the beginning of the rise and fall of interest rates, with the Bank of England moving rates many times from 1847 to the current day. The rates were changed by many things, war, economy and even the collapse of London bank, Overend, Gurney and Company caused the rates to rise a massive four times in May, finally hitting 10%, only the second occasion this had happened up until that point.

In 1890 the Bank of England had to bail out a major bank in Barings, which helped to avoid the collapse of the whole banking system due to heavy losses overseas, mainly in Argentina. Fast forward around 100 years and the interest rates hit their highest every peak to date, reaching a massive 17 percent, which introduced the early governing months of the Tory party, led by Margret Thatcher.

Despite a large rise in 1992 to avoid Black Wednesday, which was soon reversed, interest rates have generally fallen, which brings us all the way to 2009 where interest rates reached their lowest every point in their 300 year history, touching 1.5% as the UK faced recession.

What do Interest Rates mean to you?

As a general rule, if you do not own a home or have much in savings, they may not mean much.

When the interest rates are low, borrowers on tracker mortgages generally pay less per month for their mortgage as long as the lender passes the cut on, but your savings earn less in terms of interest. The opposite occurs when the rates are high, as borrowers on tracker mortgages generally pay more, but you earn more on your savings. Of course, borrowers on a fixed rate mortgage will be unaffected in terms of mortgage repayments.

Loans tend to be unaffected as a general rule, as most borrowers with a personal loan will be on a fixed rate. If recent events are any indication then rates for new customers are also unlikely to fall.

History has shown that the Bank of England has successfully controlled the finance of the UK by raising and lowering interest rates when needed, if this were not the case then we would be in serious trouble now. Although the latest cut does indicate significant problems ahead, taking this kind of action will help millions of people survive the next couple of years, and as for the question will they rise again, yes, of course they will, it’s only a matter of time … and more interest rate history will be made.

So another rate cut by the Bank of England to the lowest ever in its 315 year history; quite something!

The next couple of years will tell us whether these cuts will work or not, but it does seem in the short-term to be counter productive.  Retail banks are not lowering their mortgage rates because the LIBOR rate is too high, and the lowering of interest rates greatly affects savers at the very time when the government is asking us to save more!  Therefore it is questionable as to who it helps in the short term.  VAT has been reduced, but on the typical item of clothing, say at £30, this is hardly putting money back in people’s pockets.

There are even suggestions that the government will have to “expand the money supply”, which to you and me is printing more money and potential inflation.  If this happens, the question that follows is who gets this new printed money?  It’s our old friends the banks of course.  The government will buy assets in the banks in exchange for newly printed money.  However, I am pretty sure that was what happened in the recent bank bailout, no?

Ultimately, there may well be a shift in consciousness here.  We have been living in a false economy for some time built on credit that doesn’t seem to exist.  “Where has all the money gone” seems an apt question right now.  With debt levels so high, the money supply may have naturally contracted with the increasing payments people need to make.  The only action that may be logically left for the government is to increase the money supply to make up for the shortfall.  However, we are walking into an inflation minefield, the one the current Prime Minster said would never happen again.

I believe we need a mentality shift away from credit, and until drastic action is taken, such as cancelling large percentages of debt, the current problems may well persist.

The question everyone seems to be asking at the moment is what will happen during this recession? Although many things will tend to be changing, there are certain key things that usually happens during a recession and these are listed below –

• Houses Prices Fall – One of the most noticeable effects of a recession is that house prices begin to fall. This is mainly because people are not buying or selling, which forces the prices down. Some sources indicate that house prices have fallen by about 20% during this current recession, with many fearing a larger drop before we get out of it. But, one thing to remember is over the history of time, house prices have continually risen, so this is just a blip in the long term graph of house prices.

• Job Losses – Another key effect of a recession is that unemployment will rise. Due to poor sales, reduced production and short term forecast negativity, employers will seek to cut costs by reducing their workforce.

• Reduced Lending – During stable and profitable times, lending is high, especially mortgage lending. During a recession lending noticeably decreases, with many struggling to obtain loans, credit cards and mortgage lending.

• Reduced Spending – People tend to save more money during a recession, thus decreasing the spending on material possessions and also the necessities in life. Consumers will tend to look for lower prices on everyday products, and put off purchasing anything that is not vital.

• Interest Rates Fall – Generally, during a recession the interests rates will fall and be lowered by the Bank Of England. This is mainly to encourage spending and to try to stimulate the economy to reveres or reduce the effects of the recession on the country. Some predict we may see interest rates drop to their lowest rate in 200 or so years, an amazing 1%.

• Businesses Close – If people are not buying and the employer has done everything they can to continue but without success, they will enter administration with the usual effect being to close down. This of course leads to fewer jobs, higher unemployment and decreased spending, a somewhat vicious circle.

• Lower Prices – Shops and manufacturers will tend to drop the prices of their products to increase the spending and therefore increasing their sales. Generally, most things will become cheaper, although electricity and gas prices do not seem to follow this trend.

There are of course other things that could happen during a recession. Some people will say that crime will rise, due to the negativity sweeping the country and the hard times many people will face. Although this is not statistically proven, it is a logical effect of a continuing credit crunch as people struggle to make day to day living affordable.

Interest rate cuts yesterday forced the Pound to an historic low against the Euro as the Bank of England reduced rates to their lowest level in 57 years. The Bank’s base rate was lowered by 1%, while the ECB reduced rates by 0.75% in a move that was widely expected by markets. Global equities are lower this morning ahead of the publication of US employment figures later in the day.

Pound Sterling - UK Markets

The Pound plummeted to a record low of 1.14 against the Euro yesterday after the Bank adjusted interest rates to their lowest level since 1951. Sterling has recovered marginally this morning as market focus switches to the US but is still sitting at very low levels, 1.47 versus the Dollar and 1.15 versus the Euro.

The UK base lending rate is now at 2%, the lowest level in 57 years. The Bank of England’s accompanying report sited weak survey data and deteriorating economic conditions for the reduction and this morning the government has urged banks to quickly pass these savings onto consumers. Although the rate cut was widely expected by markets, the value of Sterling plummeted following the decision and is likely to remain under pressure as further reductions are expected in early 2009. The London FTSE 100 had dropped nearly a percentage point this morning as markets predict the worst jobless figures in 26 years out of the US today. There is no data out in the UK today.

US Dollar - US Markets

The Dollar is broadly weaker this morning as market focus moves to the US with the publication of the official US unemployment rate. As it is strongly correlated to consumer confidence and business sentiment, rising unemployment is likely to induce bearish trends in markets and the US Dollar. Economists are predicting a 0.3% rise from 6.5% to 6.8%. As the US accounts for 25% of the global economy, US economic outlook is inextricably linked to global prospects. Further negative data will have a bearing on the next interest rate decision and we could see the Fed cutting base rates to 0.5% this month. The price of oil continues to plunge below $44 a barrel amid little disruptions to supply, fuelling the decline in inflation rates around the world. The unemployment rate and non-farm pay roles are due at 1:30 today.

Euro - European Markets

The Euro has gained against the US Dollar this morning and most of its European currency partners, although is down slightly against the Pound to 0.86.

The ECB also slashed interest rates yesterday by 0.75%, taking the base rate to 2.5% and making it the largest cut in the Bank’s 10 year history. Sweden also cut interest rates by a record 1.75% taking their base rate to 2%. Many economists fear deflation is the next major issue for the Eurozone as interest rates approach zero and Trichet is coming under pressure to form a contingency plan for this scenario. There is no major data from the Eurozone today.

The Bank of England have announced another cut in interest rates to their lowest levels since 1951, it is great to see some top level action but how will this help and is it the best we can do?

Firstly, lowering interest rates should have a positive effect for homeowners, cutting their monthly repayments and putting “money back in their pockets”.  It is also possible that lower interest rates will mean more purchases of homes with the better deals that could be available.  This is assuming of course that the lenders pass these cuts on and improve lending conditions.

However, the burning question must be: are we tackling the cause of the problem or handling the effects?  Ultimately, the major problem as I see it is the level of personal debt, not just with mortgages but credit cards.  Consumers who are “maxed out” on credit cards and just about covering their monthly commitments will not be able to increase spending on the back of numerous interest rate cuts.  Banks will not feel more assured to lend to consumers, or businesses, if the current debt has not been reduced.

The government, to its credit, has started discussing mortgage holidays until economic conditions improve.  This is a start but a start only.  If the government really wishes to stimulate spending, then the only way will be to create in the first instance, credit card debt holidays, and ultimately a cancelling of a % of credit card debt to increase consumption.  Many will argue that borrowers got themselves into this state and therefore should get themselves out of it alone.  However, with banks being granted bailouts, why shouldn’t this program be expanded to include a consumer bailout?

It goes against the capitalist mindset, but the financial precedent has been set.  Only once personal debt has been reduced will banks feel more secure in lending, spending will then increase and the economy can return to a period of growth.  Whether credit card companies feel the same way is another matter…