No change in interest rates in UK welcomed

The Bank of England’s decision to keep interest rates at an historic low of 0.5% is widely welcomed with experts pointing out that there is no need for rates to rise as budgetary measures are doing the job already.

Inflation worries are far outweighed by other factors, according to Ray Boulger of leading independent mortgage adviser John Charcol. ‘In the short term commodity price increases, especially oil, will exert further upward pressure on the CPI but because these inflationary factors are outside the MPC's control, and wage inflation remains subdued, there is little to be gained by hiking the Bank Rate, especially when that part of the increase in inflation due to the VAT rise will fall out of the year on year calculation in a year’s time,’ he said.

‘With wage inflation running well below CPI inflation the increased cost of living will have a similar impact on consumers to a rise in interest rates. Furthermore the budgetary measures already announced will have a negative effect on the economy in the new tax year. Thus an impact on consumers similar to that of a Bank Rate rise is being achieved without the rate actually increasing,’ he explained.

‘As the Euro contagion spreads, even to the country hosting the EU seat of government, the negative impact on the economies affected of sorting out the mess must have some impact on the 50% of our exports which go to the rest of Europe. This, plus the austerity measures directly affecting the UK, leaves our economy too weak to sustain an interest rise yet.  In fact, the possibility that the next move by the MPC will be to introduce QE2 looks as likely as an increase Bank Rate,’ he added.

Nick Scarrett, head of Savings and Investment at Fair Investment Company also believes that maintaining the base rate at 0.5% was the right decision. ‘The MPC was in a very difficult position. There have understandably been calls for a rise this month, because pensioners and savers are still suffering as a result of the rate having been stuck at 0.5% since March 2009,’ he said.

‘And although the low rates combined with inflation makes it very tough for those trying to live off income from their savings, I think sticking at 0.5% was the right decision. The economy is not yet strong enough to cope with a rise as the recovery is still too sketchy. In December’s vote, only one member out of nine voted for a rate rise, as the majority of the monetary committee were happy that there was sufficient capacity in the economy to lead to a reduction in inflation over the medium term, to enable them to leave rates where they were,’ he explained.

‘This year will see thousands more redundancies in the public sector and a rise could see people locked out of their homes. Although the decision is not supposed to be politically motivated, it would have been risky to raise rates now. I can’t see the rate moving for the rest of this year,’ he added.

However, moneysupermarket.com is predicting interest rates rises this year and points out that a 1% increase in Base Rate would add £77 to the average monthly tracker repayment mortgage.

It is warning borrowers to prepare for Base Rate increases this year and says that anyone concerned about higher mortgage payments should consider fixing now. A number of lenders including Lloyds TSB and Newcastle and Skipton building societies have pulled some of their fixed rate deals in recent days.

‘With inflation remaining stubbornly above the government’s 2% target, pressure is mounting on the Bank of England to start increasing interest rates and a growing number of economists think Base Rate will go up in the first half of the year,’ said Clare Francis.

‘This will obviously affect those with variable rate mortgages. Fixed rates mortgages are beginning to get more expensive. We’ve already seen a number of the leading deals pulled from the market and more are likely to disappear over the coming days and weeks to be replaced with higher rate products,’ she added.