The Bank of England's monetary policy committee (MPC) has announced its decision to hold the base rate of interest at an even five per cent.
It is the sixth interest rate decision the MPC has made so far this year and the fourth time it has decided to maintain the base level. The group last decided to alter interest rates in April when it announced a drop of 0.25 percentage points from 5.25 per cent. This decision came in response to higher food and energy prices, as well as a depreciating strength of the pound on import costs.
Following the decision, it is possible that consumers find that the monthly demands of mortgage and loan repayments do not come under further strain as the MPC looks to peg back inflation and maintain a stable financial system. Commenting on the decision, financial services provider Abbey suggested that MPC members must have considered that signs of slowing output growth needed to be measured about expectations of future inflation and further contractions in economic activity.
It added that the minutes of the meeting, which are due to be published on Wednesday June 18th, should give additional insight into the reasons behind the decision. The group does not rule out a further rate cut later in the year, although it notes that future decisions will be heavily influenced by the rate of inflation in the coming months.
Meanwhile, Barclays has noted that the MPC is in a difficult position as it looks to fulfil a dual responsibility to keep inflation low and encourage economic growth.
"There is no doubt that UK economic growth is moderating - the credit crunch has reduced the availability of credit, the housing market is slowing down and the high street is showing signs of softening. Real incomes are also being squeezed by high inflation, which has the potential to further reduce household demand. Meanwhile, inflation is way above target and set to go even higher in the coming months. However, as you look into 2009, slowing economic growth should reduce capacity pressures and thus inflation and therefore there is still the possibility the MPC could cut interest rates later on in the year," the bank states.
Inflation is currently set at three per cent, with a further consumer price index decision expected on June 17th. The Council of Mortgage Lenders noted that its prediction of a rate hold were fuelled by the Bank's need to keep the rate of inflation low in a weakened economic outlook. However, it noted that a tightening in UK loans approvals and affordability pressures in the housing markets needed to be addressed. The group stated that it hoped the Bank's liquidity scheme would help to alleviate some of the pressure faced by mortgage UK loan providers and in turn assist struggling borrowers later in the year.
The base rate stood at 5.5 per cent at the beginning of the year, but two cuts of 0.25 percentage points in both February and April left the rate of interest at a level not seen since the latter stages of 2006. Commenting on the last rate cut, Sean Gardner, chief executive of MoneyExpert, described the development as a"welcome relief" for consumers.
