UK interest rates held at 5.75%

The Bank of England’s Monetary Policy Committee today voted to maintain UK interest rates at 5.75%.

In its August Inflation Report, the Committee’s central projection was for inflation to remain close to the 2% target over the forecast period and for output growth to ease, reflecting a slowing in both consumer spending and business investment.

In recent weeks, heightened concerns about a variety of asset-backed securities have led to disruption around the world, not only in markets for those financial instruments but also in money markets more generally. The MPC’s mandate is to set interest rates to meet the Government’s 2% target for CPI inflation. So the Committee discussed these developments and other economic data in terms of their implications for the outlook for inflation.

CPI inflation fell back to 1.9% in July and may remain around, or a little below, the 2% target for the next few months. Pay pressures remain muted. There are tentative signs of a slowing in consumer spending. But the recent solid pace of output growth has been sustained and the margin of spare capacity appears limited. Indicators of pricing pressure remain somewhat elevated.

It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households. As stated in its August Report, the MPC is monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation.

Against that background, the Committee judged that no change in Bank Rate was necessary at this meeting to keep inflation on track to meet the target in the medium term.

Stephen Leonard, Director of Mortgages at Alliance & Leicester, commented: “Today’s MPC decision to maintain rates at 5.75 per cent was widely expected. We are still seeing the effects of the previous rate rises filtering through to homeowners and the latest inflation figures are now back below the Government’s 2 per cent target.

“The Monetary Policy Committee will undoubtedly have taken a range of factors into consideration when making its decision on this month’s base rate announcement.

“For borrowers, today’s rate decision will be a welcome relief. For borrowers needing financial security and the ability to budget for their outgoings, a fixed rate mortgage will prove invaluable. However, for borrowers who are financially flexible, tracker mortgages can still offer good value.”

Trevor Williams, chief economist at Lloyds TSB Corporate Markets, commented: “There are very good reasons why the Bank of England has kept the lid on rates this month. Above all else, the market turmoil of the past few weeks means it is simply not the time for a rise. One consequence of the so called ‘credit crunch’ has been that banks have become increasingly wary of lending to each other – and as a result the rates at which they lend have edged up substantially.

“The MPC, understandably, wants to drag these rates back down and knows that its best hope of doing so is to keep base rates at 5.75 per cent. This is also why it has increased the reserves that banks can hold with it - by doing this it gives the banks more liquidity which will ultimately help bring their lending rates closer in line with base rates.

“It has to be said, however, that even without the credit crisis, rates would probably have stayed on hold this month. Falling inflation, slowing earnings growth and the cooling housing market are just a few of the many signs that rates have probably reached their peak.

“As for the future, we can probably expect rates to be kept at their current level for a while yet. The MPC will want to wait for the pain of the credit crisis of recent weeks to ease - and for the effects of past rate increases to show through more clearly.”