The Bank of England has frozen base rate at 5% amid pressures of rising inflation and slower economic growth.The move was widely expected across the financial services sector, though some within the housing market have called for a 0.25% reduction to bring down borrowing costs, thereby helping first-time buyers onto the market.
But with inflation hitting 3.3% last month, it was anticipated by several organisations such as the Confederation of British Industry that rates would remain unchanged.
The BoE’s Monetary Policy Committee has had to balance growing evidence of an economic slowdown against the problem of rising inflation.
Ian McCafferty, chief economic adviser for the CBI, says: “It was of little surprise to the markets that the bank held rates unchanged this month.
“The MPC needs to continue to stick to its mandate of delivering stability over the medium-term. A rate rise now would do little to influence the further rise in inflation expected in the near-term.”
He adds: “There is as yet little sign that the rise in commodity prices has had any effect on wage bargaining and hence core inflation.”
Andy McQueen, managing director of The Mortgage Works and UCB Home loans, suggests changing sentiment in the City means the expected outlook for future interest rates has altered in recent weeks.
He says: “While today’s decision was widely expected, the mood in
the City has been changing.
“In the last month we have seen a shift from a certainty that interest rates would continue to increase, to an expectation that they could be lower than previously thought over the next two years.”
McQueen adds: “This change, which has been reflected in forward swap rates, has mainly been influenced by the worsening state of the economy, particularly highlighted in recent weeks by the news of redundancies coming from the house builders.”
He says a worsening economy will prompt the MPC to maintain, and potentially even drop, rates going forward despite the threat of above-target inflation.
Ben Thompson, director of mortgages for Legal & General, says: “Money markets and pundits alike have been quick to assume that the BoE’s decision to manage away inflation vigorously means an imminent rise in the base rate.
“However, what today’s decision reflects is prudent sensitivity to the fact that in the face of an economic slowdown, inflation ought over time to return to more manageable levels.”
He adds: “This is a welcome view, as for now at least this protects borrowers from an increased level of financial pain.”
Jonathan Cornell, managing director at Hamptons International Mortgages, says: “If inflation at 3.3% can’t force the MPC into making a decision I don’t know what will. While any increase in the base rate signals worries for borrowers, unstoppable inflation is not a happy compromise.
“June, like May, has done little to raise people’s spirits. Rising energy and food costs, coupled with decreasing house prices, will mean some people have felt more than just a pinch.”
Cornell adds: “Consumer confidence continues to plummet and there seems very little to keep our hopes up.”
He says that while the MPC takes another month to weigh up its priorities, borrowers should view the time as a lull before the storm and look to arrange their finances accordingly.
Brian Murphy, head of lending at the Mortgage Advice Bureau, says: “The MPC’s decision signifies the third consecutive month that the base rate has been held and the fourth since it was last cut.
“While the MPC’s prime concern is to keep inflation in check, factors such as a bleak housing market, as well as rising food and energy costs, have pulled the MPC from pillar to post in their decision over which area to prioritise.”
Murphy adds: “Increased food, transport and utility bills have placed additional pressures onto the consumer, reducing the amount of disposable income available to them each month.
“This has resulted in a sharp drop in consumer spending, and subsequently consumer confidence has nosedived to levels not seen since the early 1990s. Maintaining interest rates at 5%, and thus providing no respite to borrowers, will serve as a further blow to confidence levels.
“We do not see any respite for consumers and hard pressed borrowers in the short-term.”
Taken from : The Mortgage Strategy Website @ http://www.mortgagestrategy.co.uk/cgi-bin/item.cgi?id=168779
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