Alliance & Leicester: MPC decision to hold bank base rate at 5.25%

Today’s decision by the MPC to hold the Bank Base Rate was widely expected following the recent cut made in response to the continued disruption within the global credit markets, softening UK house prices and mortgage approvals data.

Fixed rate products remain a good choice for borrowers
Base Rate remains at 5.25% for March 2008

The MPC continues to face a number of real challenges when managing inflation in 2008. Higher energy and food prices plus increased personal borrowing costs continue to exert upward pressure, with the Bank of England now forecasting inflation to move above 3% during 2008 before falling back thereafter. Many analysts predict only modest further cuts, with the Base Rate potentially reaching 5% by the half-year, a view reflected in the medium to long term pricing of money – currently at just under 5%.

Mark Blackwell, Director of Intermediary Sales at Alliance & Leicester, comments: “Whilst borrowers paying a variable rate benefited from last month’s quarter point reduction, the market view is that MPC only has limited room for further manoeuvre in 2008. In such an environment, borrowers need to think carefully about the down side of locking into variable rates as the economic environment can change quickly, and the MPC could raise rates in the future to meet its 2% CPI target.

“Fixed rate products continue to remain a wise choice for first time buyers, people moving house or refinancing. With 1.4 million borrowers expected to come off very low fixed rate products in 2008, choosing another similar product will help to manage the impact of higher monthly payments by fixing the amount therefore allowing homeowners to budget accordingly.”

Mark Blackwell continues: “Currently variable & fixed rates are similarly priced. However, given the challenges faced by the MPC, borrowers will need to think very carefully before purchasing a variable rate option as any short term benefit from any fall in rates this year can easily be eroded if rates start to go up in 2009.”

The MPC continues to face a difficult period with inflation remaining above target at 2.2%, and expected to rise sharply this month, against a backdrop of slower economic growth and continued disruption in the global credit markets. Although last month’s Inflation Report indicated that further interest rate cuts are on the MPC agenda, it seems more likely that we will only see one or two further cuts later in the year. With the UK economic fundamentals remaining sound MPC has the option to increase the Base Rate if continued upward pressure on inflation remains.

Mark Blackwell concludes: “As more and more people delay making a move onto the property ladder, buy to let landlords are continuing to see high levels of occupancy and improved rental yields. Landlords with a sizeable deposit or equity in their property might want to consider a tracker product, but again a fixed rate does remove the uncertainty around mortgage payments, and in the current climate perhaps remains the prudent choice for landlords.”