Bank of England freezes interest rates at 5%

9 July 2008

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."

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