Interest rate held for second month

7 May 2009

The Bank of England has voted to hold the official interest rate at 0.5% for May, following a similar freeze in April.

Last month the central bank’s Monetary Policy Committee (MPC) ended six months of rate cuts, which saw the base rate fall to an all-time low of just half a percentage point.

The central bank has also pledged to continue with its quantitative easing measures, where it creates more money. It will increase this scheme by £50 billion to £125 billion. It expects it will take another three months to complete this programme, with the amount of money creation kept "under review”.

In a statement, the Bank of England says the world economy remains in “deep recession” with the banking and financial system remaining fragile.

Despite the fall in inflation in March, to 2.9%, this remains “significantly higher” than the 2% inflation target. The central bank says the Consumer Prices Index (CPI) – the official measure of the cost of living – will continue to drop and will fall below the 2% later this year.

It predicts measures such as quantitative easing will lead to “a recovery in economic growth, bringing inflation back towards the 2% target”.

However, it admits the timing of that recovery is “highly uncertain”.

“In the light of that outlook and in order to keep CPI inflation on track to meet the 2% inflation target over the medium term, the MPC judged that maintaining base rate at 0.5% was appropriate,” the central bank said in its statement.

Impact on consumers

The low base rate is bad news for savers, as interest rates on accounts have fallen as well.

James Caldwel, director of, says pensioners are the worst hit.
"This time last year, pensioners were enjoying interest rates on their savings that were 10 times what they are now, when the base interest rate stood at 5% - now the average no notice savings account has a rate of just 0.65%," he adds.
However, for homeowners with mortgages that track the base rate, the news will probably be well received.

But Andrew Montlake, director of independent mortgage broker Coreco, is concerned that when the base rate does start to go up again (as it inevitably will) these borrowers will get a shock.

"There is growing concern that inflationary pressures will ignite a series of sharp rate hikes later this year and on into 2010," he explains.

"With house prices still likely to be low when rates do start to rise, many homeowners will be at the mercy of higher interest rates without being able to remortgage because of insufficient, or negative, equity."

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