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Fed cut adds to pressure on MPC

Written by Jim Barnaby

Tuesday, 01 April 2008

America's central bank, the Federal Reserve, slashed the cost of borrowing again this week with a three quarter per cent cut in interest rates. The move came amid ongoing turmoil in the financial markets, prompted by the collapse of the US sub-prime mortgage market in the second half of last year.
This week, Bear Sterns, one America's oldest investment banks, became the latest victim, when it was saved from total collapse by a cut price JP Morgan Chase buy-out. In Britain, Northern Rock has been forced into administration and in the last few days announced 2,000 job losses - a third of its workforce.
Few would accuse the Fed of being slow to act. Its key interest rate now stands at just 2.25 per cent and there is talk of further cuts in the coming weeks and months. But interest rate cuts alone might not be enough to revive the economy and encourage lenders to pass on reductions in the form of cheaper loans.
"I think that the problem is actually bigger than the Fed and time will be the only thing that can heal this," financial analyst Heather Whitney told Channel Four News.
While the Fed rate might be falling, banks are holding on to their capital and want to limit their exposure to risk, even at the expense of market share. That means that a lower Fed rate might not mean a lower property mortgage rate.
"Fundamentally they [the Fed] are not changing the interest rates in the economy because what's happening is the spreads between Fed rates and the other rates are widening," Martin Wolf, economics commentator at the Financial Times, told the BBC's Today programme.
In Britain, the Bank of England's monetary policy committee (MPC) has a similar problem. Its policy has been to reduce rates more gradually, with two quarter point cuts in December and February. But the downward trend in interest rates is not being reflected on the high street.
Instead, lenders are tightening their criteria, requiring larger deposits and increasing repayment rates on fixed and tracker mortgages. The Financial Services Authority (FSA), the government's financial regulator, believes 1.4 million homeowners will be coming off fixed rate deals this year.
There is growing concern that many of them will face serious problems meeting their repayments as the rates they are likely to get on a new mortgage will be much higher than the one they agreed if they fixed two or three years ago.
This has made homeowners who might have been thinking of moving this year, change their plans and wait out the current turmoil. Most analysts agree that there will be a significant correction this year, with a possible drop in house prices of up to ten per cent.
While this will be bad news for anyone remortgaging property or looking to get a on the property ladder for the first time, there will of course be winners too. Certain property types will suffer more than most, meaning that some homeowners might see the gap between what they own and what they aspire to own narrow. Also, investor buyers, who have larger deposits to put down and do not have to worry about a chain, are likely to be in the market for a bargain as less flexible vendors get nervous.
In today's world Property investment is an excellent investment option especially investment in UK

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About The Author:

Jim Barnaby is a real estate investment broker and successful property investment adviser delivering research and selected UK and overseas property investment solutions with experience in spanish properties, french property investment, German property, Cyprus holiday homes, Property in Cape Verde, German property investment, cape verde property buy to let property

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