MPC Decision Jun 2008

Published:

05 June 2008

Topic:

Video,Money,Interest rates

Bank of England announced that interest rates remain on hold at 5% for a second consecutive month, Moneysupermarket.com editor Clare Francis takes a closer look at how this may affect the mortgage market...

Transcript

The Bank of England's Monetary Policy Committee voted to keep interest rates on hold at 5% today. This is the second consecutive month that interest rates have been held but sentiment has changed significantly over the past four weeks.

In May most economists expected the next move in interest rates would be downwards. However, a growing number are now warning that Bank rate may actually have to go up.

Recent economic data depicts worrying signs that the housing market and retail sectors are slowing more quickly than anticipated - factors which would normally point towards further interest rate reductions. However, rising inflation is a more pressing concern at the moment.

Shock figures revealed inflation had surged to 3% in April - 1 percentage point above the 2% target and the Bank of England has warned that it may hit 4% over the summer as rising fuel, energy and food prices continue to bite. The Bank also said that it could take two years for inflation to come back down to 2%. This gives the MPC very little room for manoeuvre in the short term.

Interest rates are expected to remain unchanged over the coming months but there is a growing feeling within the City that we could see Bank rate rise again later this year or early next. This is by no means a dead cert - if the economic slowdown gathers pace the MPC may have little choice but to cut interest rates again. But homeowners shouldn't bank on this.

This will be a blow for those with variable rate mortgages as many will have been hoping that further interest rate reductions would help bring their mortgage costs down. And demand for fixed rate mortgages is expected to increase as borrowers seek to protect themselves against the possibility of rising interest rates.

If you are looking for a fixed rate deal, advisers recommend you act quickly. We have seen Abbey and Nationwide increased their fixed rate mortgages in the last week and many other lenders are expected to follow suit.