Lunchtime news Tuesday 22 January 2024

Governor of the Bank of England, Mervyn King, has warned that the UK economy faces its toughest challenge since 1997, with a period of above target inflation and marked slowing in growth: ‘2008 is likely to see higher energy prices, higher food prices and, with a lower exchange rate, higher import prices, pushing inflation above 2 per cent’. His comments to Institute of Directors members came after the US Federal Reserve surprised everyone with its largest cut in interest rates in 25 years, bringing them down to 3.5 per cent from 4.25 per cent in a bid to stave off recession. The Bank of England’s monetary policy committee which set Britain’s rates are meeting again on 6/7 February, however most analysts, while expecting a rate cut, believe inflationary concerns will prevent the bank from making a dramatic cut.

The Conservatives have warned that Gordon Brown’s pledge of building three million new homes by 2020 is ‘doomed’ because of the slowdown in the housing market. Following the global credit crunch and turmoil in the financial markets, analysts predict that the housing market will cool and say that builders are already scaling back on plans as demand decreases. Grant Shapps, shadow housing minister said that deteriorating market conditions meant disaster for the government’s plans: ‘It is becoming clear that the government doesn’t have a cat in hell’s change of meeting its targets.’

Abbey National has become the latest banking institution to make it difficult for first time buyers to get a mortgage. It has lifted interest rates on its no-deposit tracker mortgages by 1.15 percentage points, to 7.99 per cent, almost 2.5 per cent higher than the base rate which stands at 5.5 per cent. An expert at John Charcol, the brokers, said the move showed the widening gap between standard mortgages and high risk mortgages: ‘Until now lenders were not pricing adequately for risk, but they have started to now.’

Following on from yesterday’s story regarding Scottish Widows being the latest financial institution to freeze access to withdrawals on its property investment funds, the Financial Services Authority has announced it is to start an investigation into the practice. A spokesperson for the FSA played down the move, saying it was not a ‘full-blown investigation’, however it plans to look into whether investors were given enough warning that their money could be locked into the funds for extended periods. There are now nearly one million UK investors with assets worth more than £6 billion in commercial property funds who are unable to access their cash.