Northern Rock shares hit by takeover rumours

Crisis-hit mortgage lender Northern Rock suffered again today despite a stock market bounce on hopes of lower interest rates.

Shares in the Newcastle-based group fell 16% amid a near-3% rally in London’s FTSE 100 index, fuelled by the US Federal Reserve’s move to cut interest rates by 0.5% to 4.75% last night and a fresh intervention to unfreeze money markets from the Bank of England.

Northern Rock’s shares fell amid rumours that the group had received takeover approaches of 200p or less – well below the group’s current share price and valuing the firm at less than £1 billion.

The Fed last night cut rates to stave off fears of a US recession and ease the credit crunch in global money markets.

In a policy U-turn, the Bank of England also said it would pump up to £10 billion into longer-term money markets next week, while minutes of its latest meeting showed inflation risks “receding”.

Soaring interest rates in three-month money markets – where Northern Rock borrows most of its cash for lending – triggered the mortgage lender’s woes as banks plagued by fears over losses on high-risk US mortgages are refusing to lend to each other.

The Bank has previously said that banks should face the consequences of risky longer-term lending but has softened its stance after confidence in the banking system was shaken by the Northern Rock crisis.

Its move followed reports that the Financial Services Authority (FSA) had repeatedly urged the Bank of England to intervene in order to avert a crisis of confidence at Northern Rock.

FSA and senior banking executives are said to have pressed the Bank to widen the types of collateral to include other, less liquid, assets it would accept when lending to financial institutions – which the Bank has done today.

There were also hopes that interest rates have peaked at 5.75% after the Bank’s policymakers decided that inflation risks had “probably receded”, minutes of their latest meeting revealed this morning.

With inflation running at 1.8% in August – below the Bank’s 2% target – some economists predicted rates could be on the way down later this year.

Jonathan Said, senior economist with the Centre for Economics and Business Research, said UK growth was likely to be lower than expected as the recent turmoil fed through to businesses and lower retail spending.

He said: “With this outlook, and following the 50 basis point cut in US rates yesterday, our expectation is for a UK rate cut this year, probably in November.”

Howard Archer, chief economist at Global Insight, said UK rate-setters were “firmly in wait-and-see mode” but the prospects of lower interest rates had increased following the crisis at Northern Rock as the Bank monitored the impact on the wider economy.

He said: “If it becomes increasingly clear that growth is being significantly hit, thereby diluting underlying inflationary pressures, the Bank of England will become more inclined to trim interest rates before the end of the year.”

In the US, the Fed’s move has been expected since data two weeks ago showed 4,000 jobs lost across the US economy.

Steadily-rising interest rates, from a low of just 1% in 2003, have seen spiralling default levels among higher-risk borrowers in the US who have struggled to keep up with rising repayments.

This has led in turn to recent turmoil in world markets as investors panic over the potential exposure of banks to US bad debts, causing a credit crunch in the money markets.

Meanwhile there were further signs that the run on Northern Rock was over today, with the group saying business levels across its branch network were returning to normal.

There were no queues at any of the group’s 76 branches, which have returned to normal hours following extended opening times on Monday and Tuesday.

Call volumes at its call centres have returned to normal, while customers can also complete internet banking transactions.

It has promised to refund any charges or transfer fees incurred by people who withdraw their money during the panic if they reinvest it in the same type of account by October 5.