Bank of England holds rates at 5%

Thursday, 5 June 2008 12:00 AM

The Bank of England has continued its freeze on interest rates.

Following its monthly two day meeting, the Bank's monetary policy committee (MPC) decided to keep the base rate at five per cent.

While a cut was previously expected - the sudden jump in inflation has put plans for interest rate cuts on ice.

The decision comes despite the need for a boost to a slowing economy, and the continued tightening of lending following the credit crunch.

Research from the Bank of England finds lending remained at a severely depressed level in April, with just 58,000 mortgages sanctioned.

In recent memory the base rate has been cut in December, February and April, and the 'one month on, one month off' pattern was expected to continue.

However, inflation shot up to three per cent in April and is expected to rise further off the back of soaring food and fuel prices.

As interest rate cuts tend to push up inflation - allowing increased borrowing and reducing the incentive to save - the tool has been lost to the rate-setting MPC.

The MPC sees inflation a greater long-term threat to the economy.

A 2.4 per cent drop in house prices in May reported today by Halifax puts further pressure for an interest rate cut - but the MPC is expected to hold firm.

"The sharp fall in house prices in May adds to the already serious downside risks facing the economy, but an interest rate cut later today remains a remote possibility given the Bank of England's concern over current elevated inflation levels and risks," said Howard Archer, chief UK economist at Global Insight.

"Indeed, the Bank of England is unlikely to trim interest rates again until August at the very earliest despite markedly weakening economic activity, a moribund housing market and a deteriorating outlook."

He added interest rates could now fall to as low as four per cent, but the UK would have to wait until well into 2009.

The majority of observers had expected a hold on rates.

"We expected the MPC to hold rates today as it wrestles to control rising inflation in a weaker economic outlook," said CML director general, Michael Coogan.

"But clearly there are still affordability pressures on borrowers and a widespread funding shortage for lenders.

"We hope that as the effects of the Bank of England's liquidity scheme feed through the financial system there will be some benefits for mortgage lenders, and in turn borrowers, later in the year."

The Royal Institution of Surveys (Rics) supports this position.

"The Rics understands the reluctance of the MPC to signal a further cut in base rates today in the light of the deterioration in the inflation picture," said Simon Rubinsohn, Rics chief economist.

"However, the raft of negative news from key lead indicators of the economy including all the CIPS surveys, the mortgage approvals data and consumer confidence makes a persuasive case for the authorities to adopt a looser monetary stance in the very near future."

Daniel Barnes

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