Bank of England holds rates again and expected to do so until near end of 2010

News - Banking

Written by Ray Clancy

Friday, 08 January 2010 10:35

Interest rates in the UK remain at 0.5% for the eleventh consecutive month with the Bank of England's Monetary Policy Committee (MPC) also making no changes to its quantitative easing programme, which currently stands at £200 billion.

Rates were widely expected to remain at 0.5%, as the MPC awaits the latest figures on economic growth. It is thought the UK left recession in the final quarter of 2009.

The decision heralds a period of low interest rates stretching into the medium to long term, according to experts and this will help maintain the recovery in the property market.
‘It is not surprising that the MPC has started the New Year cautiously by leaving monetary policy unchanged, particularly as the quarterly Inflation Report next month will give a more thorough update of the economy,’ said Jennet Siebrits, head of residential research at CB Richard Ellis.

‘There appears to be growing sentiment that the property market is emerging from the recession with small increases in house prices reported for the last several months. However, the market is still very volatile and vulnerable to shocks so it would be foolhardy for the Bank of England to make any drastic decisions about the base rate until the second half of the year,’ Siebrits added.
According to Royal Institution of Chartered Surveyors chief economist Simon Rubinsohn said he expects that the base rate is likely to be left on hold until the very tail end of this year whilst there are still concerns about the fragility of the improvement in sentiment.

‘However, the market is already beginning to push up the cost of money to households, albeit very modestly at this stage. For the time being, this will not act as a material deterrent to prospective purchasers in the housing market. Indeed, the signs that lenders are now willing to be a little more generous in terms of loan to value ratios may be more pertinent in terms of converting buyer interest into actual property transactions,’ he said.

Simon Gammon, head of Knight Frank Finance, also believes that the situation is unlikely to change in the near future. ‘Although there are signs that inflation is starting to increase in combination with the increase in the rate of VAT, there are no indications that the Bank of England is planning to reverse its low-rate policy soon. In fact, inflation may well fall back in the latter half of the year,’ he explained.
‘If you are considering what to do with your mortgage right now, five year fixed rates are available at under 5%, however we are seeing the majority of our clients still opting for penalty free tracker loans. This allows them not only benefit from the current lower rates, but also to keep their options open. However, these types of deals are not widely available and careful searching of the marketplace will ensure you get the right deal,’ he added.

Azad Zangana, European economist at Schroders, said the MPC is unlikely to raise interest rates until a sustained recovery is certain, possibly in the fourth quarter of the year. ‘We agree with the Bank of England's view that short term inflationary pressures are temporary and we expect inflation to fall back towards the end of the year,’ he added.

Analysts at Legal & General also expect the Bank to remain cautious will into 2010. ‘We have never seen financial intervention and stimulus on this scale before and we don't know for sure how it will pan out for borrowers. The normal rules don't necessarily apply,’ said Ben Thompson, director of mortgages at L&G.

But the Bank's decision to hold rates is bad news for savers. ‘Obviously the decision is not great for savers but any upwards move would only have been marginal, with minimal positive effect. The Bank is still very sensitive to the large numbers of people with debt, and they are higher on its agenda right now,’ said Steve Folkard, head of pensions and savings policy, AXA.