News

Bank of England policymakers have been urged to cut interest rates this week in a bid to head off the threat of a sharp slowdown in the economy.

The Ernst & Young ITEM Club, which uses the Treasury’s economic model for its forecasts, said a cut from 5.75% would show the Bank of England responding with “appropriate vigour” to the risks posed by current turmoil in money markets.

ITEM warned recently that GDP growth could be reduced by as much as 1% in 2008 and 2009 if a full-blown credit crunch develops. It added that more than one rate cut may be needed to prevent a significant slowdown in growth.

However, the majority of analysts think the Bank of England’s monetary policy committee (MPC) will announce a no-change decision on Thursday.

cut is more likely to happen in November, when the Bank will have more information about the extent that consumer confidence and economic growth have been affected by the recent credit squeeze.

The committee is likely to be wary about trimming interest rates at a time when high oil and food prices could cause inflation to spiral well above the Government’s target of 2%. The Bank’s last economic report in August said rates probably needed to hit 6%, although this now seems to be off the agenda.

Howard Archer, chief UK and European economist at Global Insight, said: “This rapid turnaround in interest rate prospects reflects the very real danger that an extended credit crunch will weigh down on an increasingly fragile looking UK economy and lead to a marked slowdown in growth over the coming months.”

He said the credit crunch was significant because of the contribution made by the financial services sector to the overall economy in recent years. Homeowners are also coming to terms with five interest rate rises in the past year, with the recent market uncertainty also forcing up the cost of some mortgages.

A study last week found that consumer confidence fell sharply after the Northern Rock crisis with spending intentions cut substantially.

Adrian Cooper, economic adviser to the Ernst & Young ITEM Club, said the MPC needed to act promptly to offset the impact of tightening lending conditions on the housing market and consumer demand.

Petrol prices will edge close to the £1 a litre mark when they rise 2p on Monday following a fuel duty increase first announced in the last Budget.

The 2p rise will take the average price of a litre of unleaded petrol to around 97.8p with diesel averaging around 99.77p.

Road users face another rise of 2p a litre next April and a further increase of 1.84p in April 2009 under the Budget announcement earlier this year.

The AA has been one of a number of organisations which have attacked the move, pointing out that prices at the pumps have increased a great deal since September 2006.

The AA said average prices in late September 2006 were 88.07p a litre for petrol and 93.39p for diesel.

The motoring organisation added that from Monday the average UK petrol driver will be paying an extra £4.84 to fill the tank than a year ago.

Petrol Retailers Association director Ray Holloway, who had asked for a deferment of the increase, said the rise will put “undue financial strain on motorists and petrol retailers alike”.

He added the number of filling stations was falling and it would “not take much to push more stations out of business”.

The Road Haulage Association and the Freight Transport Association had also called on the Treasury to defer the increase.

Both organisations pointed out the 2p rise takes the fuel duty element of the price of a litre of diesel in the UK to 50.35p compared with an average for the rest of Europe of just 22.7p a litre.

Household wealth has more than doubled during the past 10 years on the back of soaring house prices, figures show.

Britons collectively had assets worth £6.336 trillion at the end of last year, after outstanding debt was taken into account, up from £2.795 trillion at the end of 1996, according to Halifax Financial Services.

The group said the total value of people’s assets rose by £4.343 billion during the past decade, massively outstripping the £802 billion rise in debt during the same period. Unsurprisingly, a large part of the gain in household wealth was driven by booming house prices, with rises in the value of property accounting for more than half of the gain.

At the end of last year, Britons were sitting on housing equity worth £2.702 trillion once mortgage debt had been stripped out, 244% more than the £787 billion of housing equity they had in 1996. The group added that the 216% growth in the overall value of housing assets comfortably outstripped the 163% rise in mortgage debt during the period.

Household wealth has more than doubled during the past 10 years on the back of soaring house prices, figures show.

Britons collectively had assets worth £6.336 trillion at the end of last year, after outstanding debt was taken into account, up from £2.795 trillion at the end of 1996, according to Halifax Financial Services.

The group said the total value of people’s assets rose by £4.343 billion during the past decade, massively outstripping the £802 billion rise in debt during the same period. Unsurprisingly, a large part of the gain in household wealth was driven by booming house prices, with rises in the value of property accounting for more than half of the gain.

At the end of last year, Britons were sitting on housing equity worth £2.702 trillion once mortgage debt had been stripped out, 244% more than the £787 billion of housing equity they had in 1996. The group added that the 216% growth in the overall value of housing assets comfortably outstripped the 163% rise in mortgage debt during the period.

Some of Britain’s gold reserves held in the Bank of England are cracking up because they were poorly made.

The deterioration could temporarily cut the value of the country’s 320-tonne reserve, which is held by the Bank on behalf of the Treasury.

A Freedom of Information request by trade journal Metal Bulletin revealed that the cracks and fissures had appeared in some gold.

The bank is said to be in discussions to establish exactly how much of its hoard is involved, although it is only believed to be a small proportion.

Some of Britain’s gold reserves held in the Bank of England are cracking up because they were poorly made.

The deterioration could temporarily cut the value of the country’s 320-tonne reserve, which is held by the Bank on behalf of the Treasury.

A Freedom of Information request by trade journal Metal Bulletin revealed that the cracks and fissures had appeared in some gold.

The bank is said to be in discussions to establish exactly how much of its hoard is involved, although it is only believed to be a small proportion.

Councils are to be allowed to borrow £500 million to settle thousands of equal pay claims among their staff, the Government has announced.

The move affects 46 local authorities in England which were facing the threat of legal action by trade unions on behalf of low-paid - mainly women - workers such as dinner ladies and carers.

Unison said the announcement was a “significant breakthrough” in its long-running battle for pay equality.

The union raised its concerns during the Labour Party’s annual conference in Bournemouth this week and was preparing a series of legal cases after waiting years to resolve the row over whether women were paid the same rates as men in equal-value jobs.

The Government said it wanted to speed up equal pay for local government women workers by allowing “significant amounts” of back pay to be treated as capital expenditure which will allow local authorities to spread the cost or fund it from receipts.

Local Government Minister John Healey said the announcement would give the authorities financial flexibility to make one-off back payments to thousands of workers.

“Local authorities have to settle their equal pay obligations but we recognise the position for many is tough and I want to do what I can to give them the financial flexibility they need to implement fair pay systems.”

Mr Healey said he would also like to see authorities do more to tackle the issue of equal pay in a “proactive and affordable manner”.

“We have already amended the regulations on capital finance to improve the process of identifying and dealing with any equal pay liabilities,” he said. “(These) allocations go a step further by allowing councils to treat significant amounts of back pay costs in 2007/08 as capital.

“This gives the flexibility they need to get on and work with unions to ensure people get the benefit of equal pay to which they are entitled.”

Northern Rock may have borrowed nearly £8 billion from the Bank of England in emergency funding, new analysis suggests.

A study of central bank accounts reveals that its “other assets” have risen by £7.75 billion over the past two weeks.

The increase is likely to represent money used to prop up the struggling Newcastle-based lender, experts said.

One report has put the size of the debt at one-third of Northern Rock’s retail deposits at the end of June.

Reviewing the central bank’s latest accounts, Simon Ward, chief economist at New Star Asset Management, noted that its assets rose by a further 3% in the week to Wednesday September 26, on the back of a 13% increase in the previous week.

Taken together, assets have grown by £14.3 billion. Of this £6.5 billion represents increased lending to the money markets.

This leaves around £7.75 billion classified as “other assets” - a category that is likely to include the Bank’s support as lender of last resort to Northern Rock, Mr Ward said.

He added: “It is possible that other undisclosed activities have contributed to the increase, but the latest figures will fuel speculation that the Bank has been forced to extend massive support to the troubled mortgage lender.”

A spokeswoman for the Bank of England said it released its bank return statement every Thursday but would not be drawn on what the figures indicated about the size of the Northern Rock loan.

Thames Water could be fined £12.5 million for reporting and customer service failings under proposals announced by water services watchdog Ofwat.

Ofwat said it planned to fine the company £11.1 million for misreporting of regulatory information and £1.4 million for failings that meant customers received poor service.

Thames Water, Britain’s largest water company, said it would challenge the proposed fine, which it described as “totally disproportionate”.

The regulator said the company had failed to provide it with “robust information” on its customer service performance. It also said poor processes and systems within the company led to customers receiving poor service, and they missed out on compensation payments they are entitled to if companies do not meet Guaranteed Standards of Service (GSS).

Ofwat said the fine sent a message to the water industry that non-compliance with the regulator was not a cheap or easy option. The watchdog’s chief executive Regina Finn said: “Water is a monopoly business and until we see a competitive market developing, Ofwat must protect customers by regulating the companies’ prices and quality of service.

“To do this we need complete, accurate and reliable information. Misreporting of information damages our ability to regulate the industry and therefore to protect customers.

“Thames’s reporting system were inadequate. Deficient systems and low business priority on reporting non-financial data led to these serious failings.

“Our proposal to fine Thames reflects this and gives a clear signal to both the company and the water industry that non-compliance is not a cheap or easy option.”

The proposal comes after Ofwat’s 2006 investigation into the company’s reporting of its customer service performance. The regulator said the fine was appropriate for the seriousness of the misreporting and customer failings, but took into account the steps Thames Water has taken to remedy the situation.

Ofwat stressed there was no evidence of fraud or deliberate misreporting and Thames Water has taken a “sensible approach” to the situation by investigating the issue, reimbursing customers and co-operating with the watchdog’s review.

Homeowners with poor credit histories could face a 26% jump in their monthly repayments when they come to remortgage, a report has warned.

Ratings agency Standard & Poor’s said around 80,000 people with adverse credit histories who are due to come off fixed rate mortgages by the end of 2008 faced huge “payment shocks” when they remortgaged.

It attributed the increase to a combination of recent interest rate rises, as well as lenders passing on to borrowers higher costs caused the current turmoil in global credit markets.

It added that many groups were also tightening their lending criteria, meaning some borrowers may be unable to remortgage at all.

The group said many specialist lenders who give mortgages to those with poor credit histories were now asking for larger deposits, and while they had previously accepted deposits of just 5%, most now demanded ones of at least 10%.

It estimates that the average person with a poor credit rating coming to the end of a fixed rate deal in the coming year will see their repayments jump by 26%, while those who are unable to take out a new loan and instead revert to their lender’s standard variable rate will see payments soar by 60%.

The report said: “Lenders have begun to pass these incremental costs on to borrowers by re-pricing their loan offerings, with published rates in many cases rising by around 100 basis points in recent weeks.

“The combined effect of this and rising base rates over the past 12 months is that borrowers who took out two-year fixed rate mortgages from late 2005 are facing one of the largest payment shocks witnesses since the 1990s, even if they are able to refinance.”

S&P said someone who took out an interest only mortgage of £85,000 in October 2005 could have had a rate of 7% giving monthly repayments of around £500. If this person was able to remortgage at the end of next month they would be facing a new rate of around 8.25% at best, which would push their monthly repayments up to £589 a month, an 18% increase.

Overall the group said assuming that mortgages rates were around 1% higher than they were in August as a result of current credit crisis, the average borrower would see their monthly repayments rise by 26% or £167.

The UK’s biggest building society has become the latest lender to increase its tracker mortgage rates due to the increased cost of funding.

Nationwide Building Society said it was raising its tracker rates for home movers and people remortgaging by between 0.1% and 0.2% from Tuesday October 2.

The group’s two-year tracker with a £599 arrangement fee will now charge interest of 5.68%.

The move follows on from the UK’s biggest mortgage lender Halifax and the country’s second biggest lender Abbey, which both announced they were raising some of their tracker rates by up to 0.2% for new borrowers earlier this month.

A number of other mortgage lenders have since followed suit, including Alliance & Leicester, Standard Life and other members of the Halifax Bank of Scotland Group.

Banks are raising their rates in response to an increase in the interbank lending rate as a result of the crisis in the US sub-prime mortgage market, which lends money to people who would be turned down by mainstream banks.

High levels of defaults on these loans, which some claim should never have been advanced in the first place, have rocked global credit markets, as the loans are packaged up and sold on to investors in order to spread the risk.

This has led to interbank lending effectively drying up, sparking the crisis at Northern Rock.

A Nationwide spokeswoman said: “Overall money market rates have reduced recently, but short-term funding has increased slightly and so these rates have increased.”

But the group did have some good news for homeowners, as it is reducing the rates charged on its fixed rate loans by between 0.05% and 0.2%. The move follows a fall in Swap rates, upon which fixed rate mortgages are based.

The City watchdog has called on insurers to make sure they are treating their with-profits policyholders fairly.

The Financial Services Authority said work it has carried out has raised concerns that some firms are not doing enough to make sure there is independent input into the management of the funds to ensure policyholders’ interests are considered.

In a letter to chief executives of insurance companies, it added that some companies with closed with-profit funds are also failing to devote sufficient attention to managing the fund as policies gradually mature.

With-profits are long-term policies that aim to smooth out stock market volatility by holding back some returns in good years to pay out in bad ones. They are often taken out as a pension or endowment to pay off a mortgage.

Sarah Wilson, FSA sector leader for insurance, said: “Since the FSA’s introduction of new rules for with-profits funds in 2004/2005, we have been monitoring individual firms’ compliance with the rules.

“The mixed picture shown in the reviews of two key areas is of concern. Senior management need to review our findings against their approach to managing their firm’s with-profits funds and take prompt action to address any shortcomings.”

The FSA found that the arrangements some firms had for independent input did not take into account wider issues that could affect whether policyholders were being treated fairly.

It added that firms also needed to better identify and manage any conflicts of interest in the way they used independent reviewers to look at the way the funds were managed, with some independent reviewers also carrying out other work for the company.

The Financial Services Consumer Panel welcomed the letter but said the FSA needed to go further.

It said the regulator’s interpretation of the rules on independent representation were not strong enough, and there were other issues that needed to be addressed to ensure policyholders had fair access to and understanding of their with-profits funds.