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Bank of England freezes interest rates

The Bank of Englands Monetary Policy Committee today voted to maintain the Banks repo rate at 4.5% for October 2005.

The previous change in interest rates was a reduction of 0.25 percentage points to 4.5% on 4 August 2005.

The Council of Mortgage Lenders says: “The Bank of England’s decision to leave its key interest rate unchanged at 4.5% was not a surprise.

“Housing transactions, mortgage approvals and gross mortgage lending have all strengthened in recent months. The market should remain well supported to the end of the year, with house prices remaining broadly stable.

“Recent evidence on household spending does not yet point to the expected strengthening. With inflation above the 2% target there is concern that inflation expectations might be revised upwards, creating a policy problem for the future.

“The market is discounting a cut in rates to 4.25% in the early months of next year. This is in line with our view that rates will fall once it is clear that inflation has peaked.”

David Bexon, managing director of, says: “The Bank of Englands interest rate decision this month was predictable but not necessarily right.

“The Committee members have made it clear that they are in no hurry to cut rates again, despite the widespread effects of the global oil crisis and the continuing downturn in consumer spending.

“The housing market is currently delicately poised and at risk of stalling further if we do not see the much-needed rate cut by the end of the year.”

Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, says: “The MPC’s decision today to maintain rates was widely expected. Recent economic data has highlighted a lower economic growth rate than forecast in the March Budget, partly due to higher oil prices and lower consumer confidence.

“The market is still noticing the positive effects of the Base Rate cut in August with a great deal of activity in the housing and mortgage markets, resulting in higher volumes of mortgage approvals in the past two months.

“Fixed rates are still very competitive, however there has been an upward movement in swap rates which means lenders buying new funds are likely to have to increase their fixed rate deals and we have already seen evidence of this.

“The choice between variable rate deals and fixed rate deals is still very much dependent on the individual circumstances of each borrower. Those on tight budgets will appreciate the security that fixed rates offer, whilst others will prefer the flexible structure of variable rates. Alliance & Leicester continues to see a high demand for fixed rate products.”

Ray Boulger, senior technical manager at John Charcol, says: “Economists views on future house prices have been hugely divergent over the last five years and still are. However, there was almost unanimity that Base Rate would be unchanged today.

“Most economic statistics released over the last month continue to point to the next move being down, and soon, but another month will allow a better assessment of the global economic impact of the recent hurricanes. Encouragingly, the oil price has fallen over 10% from its recent peak and so this particular inflationary threat appears to be receding.

“On a national basis house prices have been relatively stable over the last few months, but there is anecdotal evidence to suggest that August’s Base Rate cut fostered some improvement in sentiment, especially from first-time buyers.

“However, despite a modest increase in the last quarter the level of mortgage equity withdrawal has fallen dramatically over the last year, and this has a direct impact on the economy as it has impacted negatively on consumer spending.

“The level of consumer confidence in the housing market has become increasingly important in the performance of the wider economy and it is this confidence factor which is a major influence in home owners willingness to increase their borrowing.

“Because the UK mortgage market is dominated by variable rates and short term fixes the Bank of England only needed to increase Base Rate by 1.25% to cool the economy sufficiently. Interestingly, this is in direct contrast to the USA where the Fed Funds rate has increased, over the last year and a quarter, by 2.75% to 3.75%, without any impact on the housing market because mortgage rates are dominated by long term rates, which are broadly unchanged over the same period. How Mr Greenspan must envy the MPC!

“There are enough uncertainties and contradictory evidence to suggest that today’s vote was unlikely to have been unanimous.The number of members of the MPC voting for a cut may give us a clue as to the likelihood of a 0.25% cut as early as next month.

“There is huge competition in the mortgage market, with lenders jostling for business and homeowners really are spoilt for choice at the moment. Two year fixes start at 4.15% and a five year fixed rate is being launched tomorrow at 4.30%. However, for home owners who can afford to adopt a wait and see approach, they are likely to be able to take advantage of even cheaper rates in a few months time.”

A spokeswoman from RICS says: “The Bank of England’s decision to leave interest rates unchanged comes as no surprise given signs that activity in the housing market has strengthened since the summer.

“Despite some commentators’ doubts as to the durability of the housing market, there is further evidence that a recovery has been sustained into September.

“However, the economic climate has been more subdued in 2005. If the economy fails to show any signs of picking up over the next few months, RICS would expect interest rate cuts to be back on the agenda.”

Duncan Pownall, mortgage development manager for Bradford & Bingley, says: “After a unanimous vote to hold last month, it was widely expected that the MPC would again keep base rate unchanged at 4.5%, despite repeated calls for a cut from the manufacturing and retail sectors.

“The slowdown in the economy is not as marked as some may suggest and while it is true that the economy has grown below its trend rate, the divergence has only been modest.

“There is still a wide range of opinion on the prospects for interest rates but we believe it is likely that base rate will remain on hold for the rest of the year unless there is very firm evidence of further weakening in the economy.”

The National Bank from Australia Bank Group has also commented on the decision.

It says: “We may see a cut in interest rates later this year, but the betting is still on no changes until 2006. The MPC is having to weigh up the competing
pressures of oil price-induced inflation and slower spending by consumers.

“UK retailers have reacted to the high street slowdown by calling for rate cuts, and recent comments by MPC member Richard Lambert suggest he is at least sympathetic.

For now, though, the ‘wait-and-see’ camp seem focussed on the rise in inflationary pressures as increases in oil and gas prices feed through in to the wider economy.

“The annual inflation rate has been running at the upper end of expectations – reaching 2.4% in August – despite demand being a touch weaker.

“Meanwhile, the recent fall in sterling, coupled with a still benign global economy has provided some boost to manufacturing as evidenced in recent surveys.

“Overall financial conditions remain supportive. For example, the FTSE 100 has been trading around four year highs. Furthermore, August’s widely
predicted rate cut has improved confidence in the housing market – with monthly mortgage approvals rising to over 100,000 in August for the first
time in a year.

“The interest rate decision remains finely balanced, however.

“While the market is split on the prospect for a rate cut this year, we believe that retailers might have to wait until spring 2006 for any further aid from the committee.”

Ian McCafferty, chief economic adviser for the Confederation of British Industry, says: “Currently there is a delicate balance between nurturing growth and keeping inflation under control and the MPC’s decision not to change the rate reflects
this as it steers a course for long-term stability.

“The economy is still growing at a reasonable pace and will continue to do so next year but there are potential risks – with regard to both growth and inflation – which the Bank must remain alert to.”


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