Quarter point rate cut examined
Updated on 07 February 2008
The Bank of England gave relief to homeowners and businesses by cutting the cost of borrowing today by a minimum quarter point.
It disappointed the City where the FTSE index of 100 leading shares dropped a 150 points.
The cut came amid some unwelcome news for the chancellor. Northern Rock's balance sheet will now be included in the national accounts due to a decision today by the Office for National Statistics.
Today's quarter point rate cut by the Bank of England should in theory ease the pressure on millions of people.
But there's growing evidence that suggests the interest rate weapon has been blunted by the world wide credit crunch, with lenders cutting back their exposure to debt across the board.
As a result, small cuts in interest rates may not end the chill in the UK mortgage market.
In January, the Bank of England reported lenders expecting to cut the level of credit they offered to consumers.
10 lenders have increased their tracker mortgage rates by up to 45 basis points and a fifth of lenders did not pass on the full December rate cut in their standard variable rate.
Somewhat awkwardly for the government, Northern Rock is now officially classified as a public financial corporation. That's because the extended support package offered to the stricken bank also involved some power of control over the Rock's corporate policy.
Based on the Rock's latest 2006 balance sheet that could bring £90bn onto government books.
Under the Sustainable Investment Rule, designed by Gordon Brown, government debt shouldn't exceed 40 per cent of national income.
Right now, debt stands at 37.7 per cent but Northern Rock's debts could add an extraordinary 6.7 per cent of national income, pushing government debt up above 44 per cent of national income, breaking their previous interpretation of the rule.
The treasury workmen have long seemed to re-excavate their self imposed rules, just as they are about to be broken.
Channel 4 News understands that when the figures are presented at next month's budget, the treasury will argue that the Rock effect is a one-off special case. As one source said, tax and spending policy is not going to change because of a broken bank in the northeast.
For a decade the boom in housing and the economy has been underpinned by these fiscal rules and the perception that interest rate cuts will always reverse any housing slump. These certainties now seem under question.
