Bank of England votes no to interest rate cut

6 March 2008

The Bank of England has voted to keep interest rates at 5.25% in a bid to offset the anticipated surge in inflation.

Despite calls from mortgage lenders for an interest rate cut, the Bank’s Monetary Policy Committee (MPC) today decided that the risk of a steep rise in inflation in the short-term has ruled out any cut in interest rates this month.

There are 11.8 million mortgaged households in the UK, with the average outstanding mortgage debt around £100,406. The fallout from the US credit crunch means that the cost of mortgages is increasing, prompting fears that some households may not be able to meet their repayments.

Fixed versus tracker mortgages?

Despite the interest rate cut in February, the cost of fixed rate mortgages has remained quite high. Experts say this is a reflection of high inter-bank exchange rates and current market conditions.

However, tracker rates have also increased over the past few months as lenders attempt to push borrowers onto fixed options.

Tracker rates are also looking more unattractive because interest rates may rise in the future in order to for the Bank of England to meet its inflation target.

Mark Blackwell, sales director at Alliance & Leicester, says borrowers should now think carefully before opting for a tracker rate.

He added: “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 home owners to budget accordingly.

"Currently tracker and 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."

Andrew Montlake, a partner at mortgage broker Cobalt Capital, says an interest cut would have helped offset the rises in tracker rates.

He added: "The Bank of England is concerned by inflation, and had already warned in February's inflation report that there may not be room for many more cuts in order to keep this in check. With this in mind, and the prospect of further rate rises among lenders, fixed rate products could prove attractive at present."

House prices

Figures from the UK’s largest mortgage lender reveal a fall in house prices in February.

Halifax says prices fell by 0.3% during February, bringing the average price of a home in the UK to £196,649.

On an annual basis, prices were actually up 4.2% last month from February 2007 - meaning the average home owner has seen the value of their property increase by around £4,390. But Halifax predicts that prices will remain flat in 2008 as a result of poor market conditions.

Martin Ellis, chief economist at Halifax, said: "While the housing market has slowed over the past six months, it is supported by sound economic fundamentals. Interest rate cuts by the Bank of England are also helping to underpin house prices. Nationally, we predict that house prices will be flat in 2008."

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