The Bank of England has voted to freeze interest rates for the fifth month in a row, despite the British economy likely to sink into a full-on recession before the end of the year.
The central bank’s Monetary Policy Committee (MPC) – which meets to set interest rates each month – last voted for a cut in April, but has kept rates frozen since then in a bid to ward off rising inflation.
The decision to keep interest rates at 5% for September was largely expected by economists, as inflation remains high and the MPC is concerned not to let it become embedded in the economy.
However, the minutes from the August meeting suggest that concerns over inflation has lessened since July, with anxiety over the economy more at the forefront of MPC member’s minds.
Economists now expect an interest rate cut before the end of the year, with most bets on a 0.25% reduction in November.
The decision to freeze rates is unlikely to be welcomed by those working in the housing market. It is hoped that a future cut will improve consumer confidence and make it cheaper for lenders to offer competitive mortgage deals to borrowers.
Earlier today, Halifax revealed that house price falls have hit double digits with values down more than 10% since last year.
Despite a rate freeze being largely expected in September, commentators have still expressed disappointment with the decision.
Andrew Montlake, a partner of mortgage broker Cobalt Capital, says a rate cut is urgency needed to help the housing market - and thus, the economy,
“Once again the Bank of England has shown caution [...] because of its strict remit to control inflation," he says. "But sometimes you have to play it as you see it, take action even if that action means you’re not doing things strictly by the book."
And others warn that, by leaving interest rates at 5% for yet another month, consumer confidence is a risk of being further dented.
Simon Pimblett, head of research and development at IFA’s The Route City wealth club, explains: "Leaving rates on hold is likely to create uncertainty rather than stability."
Most commentators are still holding out for an interest rate cut before the end of the year.
Edward Menashy, chief economist at Charles Stanley. says that data indicating inflation has peaked could pave the way for a cut in November.
“Data from Germany, Spain and China [indicates] that the rate of inflation has started to decline because of the fall in prices of oil and other commodities," he says. "The UK Consumer Price Index (CPI) is expected to reach 5% in September or October 2008. In consequence, this achievement could lead to an interest rate cut as early as November 2008.”
The minutes of today's meeting - due to be published on 17 September - should give a better indication of the short-term outlook for rates.
At August's meeting, MPC members were divided with Tim Besley voting for a rate rise, David Blanchflower voting for a cut and the remainder voting for a freeze.
Peter Newland, an economist at Lehman Brothers, says he expects Besley and Blanchflower to have made similar votes today.
Blanchflower recently suggested in an interview that he would even push for a cut of more than 25 basis points.
Newland adds that falling oil prices should increase confidence among MPC members that inflation has peaked, focusing their attentions on the bleak outlook for the economy.
"We continue to expect the next rate move to be down, with a 0.25% cut in November and 1.25% of further easing in 2009," he says.