Bank Holds The Base Rate
Despite pulls in both directions the Bank of England’s Monetary Policy Committee has left the base rate unchanged at 5% for June. Although the economy could do with a boost from a lower interest rate, the threat of higher inflation is a continuing worry for the Bank.
The Bank of England base rate was left unchanged at 5% on Thursday as the Bank’s Monetary Policy Committee decided to steer along the middle ground.
Experts had begun to call for a cut in the interest throughout the week in order to boost the economy and help with mortgages. However, the threat of rising inflation – already at 3% and forecast to get close to 4% - caused the bank to err on the side of caution and not cut the base rate.
The 2% target for inflation looks a long way off as fuel, energy and food prices have taken the Consumer Price Index to 3%, and most consumers would say that that is a gross under-estimate. The MPC has the duty to try and get the inflation rate down to the target level, but it has been overtaken by world events – many beyond its control. However, the interest rate is within its control, so cutting it would have been seen as irresponsible with regard to inflation.
On the other side of the coin the credit crisis continues to undermine the economy and Halifax has just reported that house prices are falling at their fastest rate for 15 years.
When inflation is above 3%, Bank of England Governor Mervyn King has to write to Chancellor Alistair Darling to explain the reasons, and King has said that he expects to write several such letters this year.
The concerns for mortgage holders is that, with inflation running upwards, the next interest rate move will be a rise, rather than much wanted reduction.
Recent history tells us that mortgage providers will not be slow in pushing interest rates up if the base rate goes up, even though they are sluggish (to say the least) in pulling rates down following a base rate cut.
Even so, most economists still forecast that the interest rate will come down, possibly to 4.25% by the end of year. This will help to boost the ailing mortgage market.
