Business View: The Bank should hold its fire on the rate cuts

Eight out of 10 Bank of England interest rate decisions are entirely predictable. The one on Thursday is almost a forgone conclusion. There is a slim chance the Monetary Policy Committee will reduce the rate to 5.5 per cent from 5.75 per cent. The cut is a possibility that seemed impossible before the recent bout of market turbulence, which culminated two weeks ago with the run on Northern Rock.

It would give a boost to markets and ease the pressure on debt-ridden consumers who seem to be reluctant to spend on big-ticket items at the moment. But while a reduction would undoubtedly be welcome in certain quarters, there may be good cause for doing nothing until the market calms down and a picture of where the country is economically becomes clearer.

The property market looks like it is heading for a soft landing, House price inflation picked up slightly in England and Wales during August, according to a report from the Land Registry last week. Annual house inflation, said the Registry, rose from 8.8 per cent to 9.4 per cent. A dip might have prompted the MPC to cut rates, but there are signs that while the property market may be slowing down, there are few signs of an impending crash.

In another report last week, however, ratings agency Standard & Poor's said that homeowners were starting to feel the strain. The impact of rate rises always lags behind the actual hikes because a lot of mortgage holders have fixed loans. Many borrowers who took out fixed-rate products between late 2005 and early 2006, when rates were at their lowest, are reaching a point when their mortgages reset to the floating rate of interest. This means they are in for a nasty financial shock.

In some cases their monthly repayments may rise by a quarter; Standard & Poors believes the average increase will be 26 per cent.

To make matters worse, the Northern Rock debacle means that all banks are now tightening their lending criteria. Previously, homeowners would simply refinance their mortgage when the discount period came to an end. Now that might not be possible, as banks deliberately write less new business. A bank that was happy to lend to Mr and Mrs Slightly Dubious Credit History (their children are bullied at school) back in 2004 or 2005 may decide not to offer them such a good deal this time round. The worse the credit history of the borrower, the worse the financial shock.

The Council of Mortgage Lenders believes that two million loans are due to reset to the floating rate by the end of 2008. This is equivalent to 17 per cent of all outstanding mortgages in the UK. But with the bulk of these not due to reset until the middle of next year, the Bank of England still has time to watch and wait before taking action to cut rates without the impending mortgage shock having too too much impact on spending.

Pearl shines brightest

Resolution shareholders have a choice to make in the next month. Towards the end of this week, the life company will supply takeover documents detailing its proposed nil-premium merger with Friends Provident. The paper deal currently values Resolution at around the 575p per share level. Also waiting in the wings to pounce is Pearl, headed by entrepreneur Hugh Osmond. There seems little doubt he is preparing a cash takeover of Resolution at 660p per share. Mr Osmond will not show his hand until he has seen the Friends offer document. Faced with the choice of a tie-up with Friends or a takeover by Pearl, it is hard to see Resolution investors not opting for the higher cash offer, no matter what Resolution might say.

Its chairman, Clive Cowdrey, wants the Friends deal to go ahead. One of the most emotional directors in the City, he would hate to get taken out of the game by Mr Osmond. But despite that, calmer heads are likely to prevail. It may cost Pearl a tad more than 660p, but I am still of the view, as I was a month ago, that Pearl remains in the driving seat.

Beyond redemption?

I am starting to feel almost sorry for Northern Rock. On the day that it became clear the bank had been obliged to go cap in hand to the Bank of England, Adam Applegarth, the com-pany's chief executive, went to great lengths to say to customers that they were more than free to take out their savings if they so wished. The sentiment was designed to quell a rising panic and reassure the world that it was business as normal.

Now it seems Northern Rock is going to get another barrage of criticism for pocketing a vast sum in redemption fees from customers who did exercise their right and removed savings from the bank's vaults. For Northern Rock, it's a case of damned if you do and damned if you don't.

The bank's customers can reclaim their redemption fees if they return money to their Northern Rock accounts. Somehow I don't see many taking that particular path.