Ray Boulger, senior technical adviser for John Charcol, said: “Borrowers will be breathing a sigh of relief at the news that Base Rate has been held for another month after nervousness over another increase heightened this week. The major relevant factors to have changed over the last month are the continuing sharp fall in oil prices and the prospect of significantly lower gas prices this winter – brought about after the unprecedented negative price of –5p per therm in the wholesale market two days ago, as a result of a huge increase in supplies coming on stream from Norway. With the oil price now a quarter below its peak of only two months ago and (in sterling terms) well over 10 per cent below its price a year ago the Consumer Price Index (CPI) should soon start to reflect this, although many benefits won’t be felt by consumers until next year.
“This prospect will mean that not only will the MPC’s concern that the CPI will breach 3 per cent, forcing The Governor to write a letter of explanation to the Chancellor, be diminished, but that the possibility of inflation falling to the target 2 per cent as early as the first half of next year is realistic. If the oil price remains at its current level or falls further over the coming month, the widely expected 0.25 per cent increase in Base Rate next month may well be averted.
“Another key reason for not increasing Bank Rate is the US economy, as their housing market falters. The Chairman of the US Federal Reserve, Ben Bernanke, said in Washington that the U.S. housing market is in the midst of a ‘substantial correction' that will lop about one percentage point off economic growth in the second half of this year and remain a drag on expansion next year. His comments follow several months of depressed new home sales and the first year on year national fall in house prices since 1995. As housing activity has been the major factor in increased US employment over the last few years the danger is that the current downturn will reduce consumer demand significantly and hence also reduce demand for UK exports.
“As far as the UK economy is concerned the huge increase in UK house prices over the last 10 years has had very little impact on inflation, even when prices were rising at over 20 per cent p.a. Therefore, although UK house prices are still increasing at well above the rate of inflation, the perception that general inflation is closely linked to house prices is highly questionable. Other factors, many of which are outside the control the Bank of England (and indeed other Central Banks), such as commodity prices, are more important.”
Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, said: “It comes as no surprise that rates remain on hold this month. However, given a buoyant economy and above target inflation, a rise in the Base Rate before the end of the year is anticipated and rates are likely to hit 5 per cent before the year is out.
“First time buyers on a tight budget should considering opting for a fixed-rate deal to secure themselves against potential rate rises. For those homeowners who are able to be more flexible with their finances, there are still many competitive tracker deals on the market.”
Stuart Law, managing director of Assetz, added: "The Bank's decision to maintain rates has prevented an over-zealous curb on consumer spending and inflation, which could itself have driven demands for higher wages, causing price growth and delivering more inflation.
"House price growth is positive but sustainable, and a further rise this year would instil fear into homebuyers, with investors and first time buyers in particular already feeling the pinch. House price growth is not an investment bubble, as some commentators said, but something driven almost entirely nowadays by the Government's immigration policy."
Milan Khatri, the Royal Institute of Chartered Surveyors (RICS) chief economist, commented: "The Bank of England's decision to leave interest rates unchanged is unlikely to be repeated next month when a quarter point increase is firmly on the cards.
"A strong housing market has been sustained despite the August interest rate hike and prices are rising at around twice that of average earnings. Positive momentum will continue in the property sector for the next few months as consumers finances remain strong and new job creation continues its upward trend. While overall inflation and wage rises in the economy are moderate, we expect a pre-emptive interest rate rise in November of a quarter per cent. This will have a gradual cooling impact on the property market but high house prices will mean affordability conditions will remain poor for first time buyers trying to access the market."
