Interest Rates Held Despite Economic Gloom

By Mark Adams | Thursday 04 September 2008 | 11:31

The Bank of England did little to help homeowners today after it voted to leave interest rates unchanged at 5% - despite evidence that the economic outlook is rapidly deteriorating.

The Bank of England’s Monetary Policy Committee (MPC) today voted to leave interest rates unchanged at 5%. The decision means that the cost of borrowing has remained static for the fifth month in a row - despite widespread calls for a rate cut to help kick-start the moribund housing market.


The decision comes as the UK economy faces a very real prospect of falling into recession. GDP growth stalled between April and June and the Organisation for Economic Co-operation and Development (OECD) said this week the UK would be the only major economy to fall into recession this year.


Even so, the MPC was widely expected to leave rates unchanged to prevent further inflation rises. The current rate of price rises is currently 4.4% - more than double the Bank of England’s 2% inflation target.

Which way next for rates?

Many expects predict that interest rates will eventually be cut - but not until the end of the year, when it’s hoped the threat of sharp rises in inflation will have passed. And that chances of that currently look strong.


"Inflation is approaching a peak, with data from Germany, Spain and China indicating that the rate of inflation has started to decline because of the fall in prices of oil and other commodities,” points out Edward Menashy, Chief Economist at Charles Stanley. He predicts rates could fall as early as November. 

Yet property experts point out that the situation offers little cheer for homeowners in the short-term. “With this week’s Government initiatives to kick start the housing market, it is unsurprising that the base rate has been held for yet another month. However, the question that becomes ever more pertinent is how much longer can the MPC stall?" asks Jonathan Cornell of Hamptons Mortgages.

 

What the decision means for your mortgage

The average cost of a mortgage has increased by more than 12% over the past year - even though the base rate has actually fallen by 0.75% during that time. The sharp climb in home loan costs has been fuelled by the credit squeeze within the international money markets, making it harder for banks to use funds to subsidise mortgage prices. 

Today’s decision will see the cost of your mortgage remain unchanged – although fixed-rate deals have begun to fall over the past two weeks as the inter-bank lending rate has fallen.  

What the decision means for house prices

Mortgage giant Halifax today revealed the biggest annual house price fall on record - August saw the annual rate of decline hit 10.9%. Today’s decision will do little to avert the threat of a house price crash yet many economists predict that the Bank will cut rates sooner rather than later to try and avert a recession and protect house prices. 

Howard Archer of economic analysts Global Economics predicts rates will be cut very soon. “It now seems a question of when, rather than will, the Bank of England cut rates," he says. 

"The MPC has clearly become markedly more concerned about the current state of the economy and the growth outlook in recent weeks, acknowledging that recession is very possible."



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