The Bank of England's Monetary Policy Committee (MPC) voted to keep interest rates on hold at 5 per cent today. Clare Francis examines what this means for consumers and the impact it may have on the economy...
The decision to leave rates unchanged is likely to have been a close call as the MPC continues to battle with rising inflation and a slowing economy. The decision to leave rates unchanged is likely to have been a close call as the MPC continues to battle with rising inflation and a slowing economy.
The minute’s from last month’s meeting revealed that the vote had been split three ways: six members voted for a quarter-point rate reduction, while two voted for rates to be kept on hold and one, David Blanchflower, having voted for a 0.5 percentage point reduction.
Today’s vote is also likely to have seen a three-way split, but unlike April, the consensus was that Bank rate should be held for the time being.
The Bank of England is walking a tightrope at the moment as it tries to keep inflation in check while avoiding an economic recession.
Inflationary pressures
This week has seen oil prices break through record levels with the price of a barrel breaching the $120 mark on the London market, and soaring through $123 in the US. There is no end in site for this upward momentum and investment bank Goldman Sachs believes we could see oil at $200 a barrel in as little as six months.
The price of other commodities also continue to rise and the Bank of England’s Quarterly Inflation Report, due out next week, is expected to show inflation running above the 2% target.
It is for these reasons that the MPC probably voted to hold interest rates this month. However, worsening economic data suggests further rate cuts will be necessary this year.
Blanchflower will almost certainly have voted for a half-point reduction today as last week he said this was essential if the UK is to avoid a slump like that in the United States.
Economic slowdown
In the last few weeks we have seen new data pointing to further weakness in the economy.
Latest figures from the manufacturing sector revealed that output had fallen by more than was expected. Retailers also continue to have a tough time, while house prices have fallen on an annual basis for the first time in 12 years. Mortgage lending has also slumped to record lows.
Despite last month’s quarter-point reduction in Bank rate, borrowers are still facing higher mortgage rates as lenders continue to struggle to raise funds for home loans.
Rates for new customers continue to rise. And while most existing borrowers with variable rate mortgages have seen their monthly payments fall, some of those on deals linked to their lender’s standard variable rate (SVR) have not benefited from the full quarter-point reduction. Providers including Northern Rock and Derbyshire, Newcastle and Newbury building societies failed to reduce their SVRs by 0.25 percentage points.
Consumer confidence is also falling – many people are nervous about buying a house at the current time in case the housing market crashes and some of those who would consider buying now are unable to because they can’t get a mortgage.
Against such a backdrop many economists believe further rate cuts will be essential in order to get the economy moving again.
However, on the flip side, while borrowers continue to suffer, savers are reaping the rewards, with numerous savings deals offering rates in excess of 6%. Click here to compare the latest rates.
And if you are struggling to find a mortgage, call one of our specialist advisers on 0845 345 5705.
Was the Bank of England right to keep interest rates on hold today or do you think they should have been cut? Are you worried about a recession or a housing market crash or do you feel that some people are panicking unnecessarily? Click reply to have your say...
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