Massive interest rate cut fails to lift stock market

The largest interest rate cut for more than 25 years failed to prevent yet another sell-off by stock market investors yesterday, as the dramatic impact of a 1.5 percentage point reduction from the Bank of England was undermined by the worst housing market figures in living memory and a disastrous set of forecasts from the International Monetary Fund.

The FTSE 100 Index of shares in the UK's biggest companies fell 5.7 per cent, closing 258 points down at 4,272. The Bank's rate cut bombshell at midday sparked the briefest of rallies before the market's decline accelerated throughout the afternoon.

The UK stock market's decline was mirrored by even more serious falls across Europe, where the European Central Bank's announcement of a 0.5 percentage point interest rate cut left investors equally unmoved. The German stock market fell by 6.84 per cent, while the French market was down by 6.38 per cent.

The global picture was completed by sharp falls in the US, where concerns about the economic outlook also dented confidence. The Dow Jones index closed down 4.85 per cent at 8,695.8.

The sell-offs in Europe and the US were partly a reaction to the latest series of forecasts from the International Monetary Fund, which has revised sharply downwards its previous economic growth estimates, made only a month ago.

The IMF said 2009 would be the first year since the Second World War in which advanced economies combined saw their output shrink. While emerging economies are still performing comparatively well, the IMF now expects the total world economy to grow by 2.2 per cent in 2009, down from its October prediction of 3 per cent.

Britain, in particular, is heading for trouble, the IMF said, predicting that the UK would suffer a more serious recession than any other developed country in the world during 2009. The IMF now expects the UK economy to shrink by 1.3 per cent over the course of the year, a very substantial downgrade compared with its October forecast of a 0.1 per cent economic decline next year.

The fund has repeatedly warned that the size of Britain's house price boom, coupled with high levels of personal debt, has left the country especially exposed to a downturn. Those fears now appear to have been confirmed by the increasingly severe collapse in the housing market. Halifax Bank said yesterday that the slump is now worse than the downturn of the early Nineties, with prices falling by a further 2.2 per cent in October.

Last month's decline means the average home in the UK is now worth 13.7 per cent less than a year ago, though Halifax makes its annual calculations by using quarterly figures. On a monthly basis, house prices are now 15 per cent lower than at the end of October last year.

Martin Ellis, Halifax's chief economist, said: "This is now a worse series of falls than we saw in the early Nineties." The average price of a home fell by 13 per cent between May 1989 and July 1995, including an 11 per cent fall between December 1990 and Dec-ember 1992.

Moreover, while Halifax said that it was beginning to see some tentative signs of stabilisation in the housing market, the bank believes prices are likely to continue to fall into next year. It expects the average home to have lost 20 per cent of its value before the market finally bottoms out.

The collapse in the housing market also continues to wreak havoc on Britain's biggest housebuilders. Bovis Homes warned yesterday it was expecting to write down the value of its land and housing stock before the end of the year, with selling prices having deteriorated markedly during the autumn. Bovis now expects to sell around 1,800 homes over the course of 2008, almost 40 per cent fewer than last year.

The slowing of the housing market is also the chief factor in a disastrous trading period for Britain's construction companies. The Office for National Statistics said yesterday that total new orders in the construction index were down 11 per cent during the third quarter of the year, chiefly because orders for new private housing more than halved compared with the same period of 2007. The value of new orders for private houses collapsed from £1.8bn between July and September last year to £878m in 2008.

The stock market's reaction to the Bank's rate cut suggests investors see little prospect of any immediate respite for the economy, with even housebuilders falling further in value. Investors also marked down mining companies, amid fears that the IMF's global economy projections imply even sharper declines in demand for commodities than previously expected, while manufacturers fell back too.

The scale of the interest rate cut may even have been counter-productive, as far as the stock market goes at least, with some investors admitting they had been spooked by the Bank's announcement.

"Traders are thinking, if we've really got to cut rates to 3 per cent, then how bad is it out there?", one dealer said, amid concern that the Bank's own data show that the UK economy is already in an even worse state than has been publicly revealed.