Bank of England freezes interest rates at 5%
The Bank of England has voted to freeze interest rates at 5% for the third month in a row.
The central bank’s Monetary Policy Committee – which sets rates each month - last voted for an interest rate cut in April, but has kept rates frozen until then.
The decision to freeze rates at 5% was largely expected by commentators. Currently, the MPC stuck between two twin concerns – whether to try and starve off the looming recession with interest rate cuts or battle rising inflation with rate hikes.
In June the Consumer Price Index – the official measure of inflation - hit 3.3%, prompting the Bank of England’s governor, Mervyn King, to put pen to paper and write to the chancellor explaining why inflation had moved so far away from its 2% target.
In the letter, King admitted that inflation could exceed 4% by the end of the year, sparking fears of interest rates rises.
This concern was emphasised when the European Central Bank increased rates on 3 July.
The next inflation figure is due out on 15 July.
The latest house price figures show that, on an annual basis, house prices in June were down 6.1%, returning to the level they were at in August 2006.
On a monthly basis, house prices fell by 2.0% in June compared to a 2.5% fall in May.
Martin Ellis, chief economist at Halifax, which produced the figures, says despite the falls, most homeowners have built up equity in their homes that should cushion declining property values.
“A strong labour market, low interest rates and a shortage of new houses underpin housing valuations,” he adds. “Our research shows that the labour market is the key driver of the housing market. Employment is at a record high."
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).