Interest rates kept at 5 per cent

Millions of borrowers will be breathing a sigh of relief following the decision by the Bank of England's Monetary Policy Committee (MPC) to keep interest rates on hold at 5%.


This had been widely expected by the City: the consensus among economists had been that Bank rate would be left unchanged this month, although some warned a 0.25 percentage point increase could not be ruled out, particularly as the European Central Bank voted for a quarter point rise in interest rates last week.

Inflation is surging around the world due to spiralling oil and food prices and the Consumer Price Index (CPI), the UK’s official measure of inflation, is running at 3.3% - 1.3 percentage points above the 2% target. The Governor of the Bank of England, Mervyn King, has said CPI would probably rise to 4% in the coming months and a number of analysts believe it may even hit 5%. Such an outlook would normally result in interest rate increases. However, we are in anything but normal times.

While inflation is rising at its fastest pace for more than a decade, the economy is slowing rapidly. Recent economic data paints a gloomy picture. New figures released today by Halifax, revealed that house prices fell by an average of 2% last month and are 6.1% lower than a year ago. The extent of the problems in the housing market have been further highlighted by recent announcements of job losses at the major house builders. Barratt Development said this morning that it is cutting 1,200 jobs and the British Chambers of Commerce warned earlier this week that we could be only months away from a recession.

Fears about the economy are likely to have been the reason why the MPC voted to hold interest rates for the time being – a rise today would have heightened the risk of a full-scale downturn.

The decision to leave rates at 5% will be welcomed by households across the country, particularly those with variable rate mortgages and those currently looking for a new mortgage deal.

Although a quarter-point increase would have taken Bank rate back to the level it was at in March, the impact of rising food and fuel prices is taking its toll on many consumers and a rise in mortgage payments would have exacerbated the financial problems many are already facing.

The fact interest rates have been left unchanged will also have come as a relief to those looking to buy a house or needing to remortgage. Even though Bank rate has been held at 5% since April, mortgage rates have been rising because of the ongoing liquidity crisis caused by the credit crunch (for more information on why this is happening watch our interview with Stephen Noakes from Cheltenham & Gloucester). An interest rate rise today would have placed further pressure on lenders.

Despite the problems in the mortgage market, a number of the major lenders have reduced some of their mortgage rates in recent days. Woolwich has cut the rate on its lifetime tracker by 0.1 percentage points, from 0.99 points above Bank rate to 0.89 points above. It has also launched a new three-year fix at 6.49%. Nationwide, Halifax and Abbey are among the other lenders that have reduced rates slightly. These developments could be early signs that the market is beginning to thaw.

If you are looking for a mortgage and need help, call one of our advisers on 0845 345 5700.

Savers may have been hoping for a rise in interest rates, but analysts say the decision to leave rates on hold shouldn’t actually have much of an impact on savings rates.

Kevin Mountford, head of savings at, said: “Banks and building societies are still desperate to attract money from retail savers because of the shortage of funds on the wholesale markets. As a result the excellent rates that are around at the moment are likely to remain and we may even see some rates climb higher, especially in the fixed bond market.”

Birmingham Midshires is offering the leading fixed rate bond and easy access rates at the moment. Its One-year Internet Fixed Rate Bond has a rate of 7.17%, while it’s e-Saver Account Issue 2 is an easy access account and is paying 6.52%. Bradford & Bingley’s Internet Saver 3 is also paying a great rate at 6.51%. Click here to compare more savings deals.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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