UK and Europe interest rates remain unchanged but uncertainty remains among market watchers

News - Banking

Written by Ray Clancy

Friday, 05 March 2010 09:51

The decision by the Bank of England to leave UK interest rates unchanged at a record low of 0.5% will not get rid of uncertainty in the markets and mean that it is savers who continue to be worse off financially.

It also decided not to extend its quantitative easing programme but many market watchers are nervous about the Bank of England governor Mervyn King’s insistence that the Bank would begin to print money again if there were signs the recovery is faltering.
They fear inflation is rising too fast.

Recent comments from Monetary Policy Committee members have suggested there is a growing division within the committee between those who believe inflation is a real risk and those who believe the recovery is still too weak to rule out further stimulus.

Minutes of this week’s meeting will be published in two weeks and will give further clues about what the committee's next move might be.

But with wages still low, shop price inflation slowing and unemployment still set to rise this year most economists agree the recent surge in inflation will prove short lived and interest rate hikes remain a distant prospect.

The Bank pumped £200 billion into the economy in its quantitative easing programme in a bid to ensure more money would begin circulating. But banks have been reluctant to hand over the cash amid widespread uncertainty about how much capital they will eventually need to satisfy new regulatory rules.

Banks have also been lifting interest rates and charges on many products as they shore up their financial situation which means borrowers are being charged more. Meanwhile, savers are getting little return on their cash.

Most commentators believe that interest rate rises are inevitable this year. ‘While it is unlikely to remain the same for another 12 months, I do not expect an increase in the next few months’, say Simon Gammon, head of Knight Frank Finance, which specialises in mortgages over £1 million.

‘Given the current state of the economy, yesterday’s decision was not unexpected. I think there is just too much uncertainty right now, not just in the UK, but in the wider global economy. There is increased talk of a double dip in property markets. There are massive concerns about the Greek economy, which could have wide repercussions. And the prospect of a hung parliament after the forthcoming General Election all lead to a nervousness in the financial markets that the Bank of England cannot ignore. Therefore, deciding to hold the base rate is sensible,’ he added.

Meanwhile Eurozone interest rates have been held at 1% for the tenth month in a row.
Though many Eurozone economies have left recession, there remain concerns about some members of the single currency block. Spain, Italy, Ireland and Portugal continue to struggle and Greek debt crisis, which blew up last month, has hit the euro badly.