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Interest rates held steady

Written by Catherine Murray

Thursday, 07 August 2008

The Bank of England has maintained current interest rates at 5% as predicted.

The Monetary Policy Committee (MPC) voted today to hold interest rates steady for the fourth consecutive month in the face of continually rising inflation.

The prospect of inflation soaring to 5% left MPC members with little room for manoeuvre, despite many gloomy economic data reports over the past month pointing to deterioration in the economy on all fronts.

The monetary policy committee faced one of their most challenging decisions to date amid warnings from many analysts and the IMF among others.

The widely predicted decision came while the committee continues to juggle sharp rises in the cost of living with an economy teetering on the brink of recession.

Gary Williamson, Chief Executive at Leeds Chamber of Commerce, comments on the Bank’s decision, saying, “Many in the business community will welcome today’s decision by the MPC to keep interest rates at 5%.”

“We are experiencing falling confidence as costs are rising and consumers have less disposable income, therefore a reduction in rates would have helped,” he adds.

The interest rated decision will not be good news for households and businesses under a lot of pressure, hoping for some relief from higher mortgage costs, petrol prices, household and grocery bills.

Williamson also notes that local economies, which are more diverse and have thus far tended to bee very resilient in recent uncertain times. “In speaking with local businesses I understand that the media and communications sector is operating with full order books, and some are even looking to recruit staff. And, at a meeting with a local estate agent, I was told that they are operating at 90% occupancy with their city centre property portfolio and that rental yield has risen by 2.5% in the last 12 months,” he adds.

“However, with inflationary pressures mounting, the economy and business in general needs a cut in interest rates. We would now urge the MPC to monitor the economy closely and not be afraid to cut rates in the coming months,” Williamson concludes.

Halifax, the UK's largest mortgage lender, further reports today that house prices fell by almost 11% in the 12 months to July. This is thought to be the first double-digit drop since the lender began publishing a monthly survey in the mid-1980s.

Halifax said that the average price of a home in the UK had fallen by almost £22,000 over the year, from £199,084 in July 2007 to £177,351 last month. Housing prices have been falling continuously since last August.

There is not likely to be any respite for the rest of the year as analysts predict the Bank of England will only begin to lower borrowing costs next year.

The minutes for the meeting will be released later this month, and the decision is likely to reveal another stand-off between members on the nine-strong MPC.

Last month's minutes showed a three-way split with seven members voting for no change in rates, David Blanchflower urging for a cut and Tim Besley pushing for a rate hike - citing concerns about inflation which at 3.8% is almost double the Bank's 2% target.

The Bank has previously said that its no-change stance - at a time when there is a downturn in the economy - sends a strong signal that the MPC is committed to bringing inflation back to target.

The Bank’s quarterly inflation report is due to be published later this month. The report will show the Bank's new set of forecasts for inflation over the next two years.x