By holding interest rates at their current level for the second consecutive month, the MPC have moved in line with industry predictions after the minutes of their August meeting revealed the vote to hold rates was a unanimous 9-0.
September’s decision will allow the full impact of the recent hikes to penetrate the market, especially after the latest research showed that house price growth is finally beginning to hit the MPC’s speed hump.
However this will only give borrowers limited extra breathing space with rates still fixed at 5.75 per cent. Many are still struggling to meet their repayments and the 250,000 borrowers who took advantage of a two-year fixed rate deal back in Autumn 2005 are becoming increasingly worried about the prospect of remortgaging in the current financial climate.
In addition to this anxiety, a number of lenders have already taken steps to either re-price or completely pull their existing mortgage deals – primarily the fixed rates – whilst simultaneously increasing rates on their remaining products. This is designed to pre-empt an increase to 6 per cent – a move which remains widely anticipated to be the peak.
However, according to Intelligent Finance, only a quarter of Brits hold mortgage products which will protect them from the impact of a further rate rise, despite their obvious financial fears. Consumer confidence has also taken a sharp knock over the past few weeks, with less people now willing to spend as they tighten the belt on their household finances even further.
David Smith, senior partner at Dreweatt Neate is pleased with this stability: “To have lowered rates would have provided the property market with a stimulus it’s better off without. The froth is slowly starting to subside and this is good news, as the one thing the market needs at present is stability. To have raised rates, on the other hand, would have seriously affected confidence — particularly at the lower end of the market, where affordability is a real issue. It may even have ushered in panic. By keeping rates on hold, the Bank can allow the property market to find its own equilibrium at its own pace.”
Alan Wilde, Barings’ deputy head of fixed income, added: “The scare-mongering and ultimately successful canvassing of the Bank of England to hold rates at 5.75%, is the work of the financial institutions and especially the Investment Banks most exposed to the fiasco that is the denouement of the US sub-prime crisis. The Bank has buckled in the face of formidable opposition by those who have lost money directly or through derivative products that have been impacted by belated tighter lending standards.
“While understandable that human emotions are easily swayed, the MPC has one objective (unlike the Federal Reserve Board of the US), which is to hit the 2% Inflation target. Growth in the UK remains strong (3% annualised growth in the second quarter), inflation expectations as reflected by the breakeven inflation rate in the Gilts market (3.5%) and house price inflation, despite 5 base rate increases in the last 12 months, is still above 11% year on year. Ordinarily, a Base Rate hike to 6% would have been delivered.
“While UK financial services are a large and significant contribution to GDP, the long term credibility of the Bank is at stake if they bail out careless lenders and greedy investors. Bank balance sheets are strong and able to withstand right-offs and losses and the MPC must not be deflected from their goal. They must focus on delivering their Inflation mandate and avoid issues of moral hazard that compromise their remit.
“The Bank may, however, have inadvertently, caused more confusion about their reaction function - the modus operandi that governs the MPC's decisions on Base Rates. On 5 Sept, the Bank went to great lengths to distinguish between emergency operations to align short term borrowing costs with official rates and the setting of monetary policy to meet medium term inflation targets.
“On Thursday, the MPC appeared to buckle to pressure from the banking sector not to raise rates even though the strength of the real economy and the tightening bias of the MPC prior to the tribulations in the money markets pointed to higher rates. It is in the Bank’s long term interest (as well as investors) to ensure that the markets understand their operations and that communication is clear and unambiguous."
Whilst Stuart Law, chief executive of Assetz, concluded: “The decision to hold interest rates at 5.75% was the only option available to the Bank of England, following their earlier debacle, as inflation fell at its fastest rate in five years, with the Consumer Price Index down at 1.9% in July.
“Rates are now pretty much certain to stay at 5.75% for the remainder of the year, before a possible fall in early 2008. All suggestions of another rise to take rates up to 6% by the end of the year have now been pretty much quashed."
