Interest rate freeze from Bank of England

Interest rates are to be held at five per cent, the Bank of England has announced.

Despite pressures from a slowing economy and the high cost of borrowing due to the credit crunch, the rate-setting monetary policy committee (MPC) has opted to hold the base rate after last month’s cut.

High in the MPC members’ minds has been the danger inflation presents to the economy.

Food and oil prices are continuing to rise – with reports suggesting the cost of oil could eventually pass $200 a barrel - and further interest rate cuts will add to this burden – as lower borrowing costs tend to spur consumer spending.

New figures from the Council of Mortgage Lenders (CML) show most homeowners will not feel the benefit of an eventual rate cut.

Around half of borrowers are now on fixed rate mortgage deals, and only a quarter of mortgage holders are on tracker deals directly linked to the Bank base rate.

However, those on standard variable rates will have to wait to see if any future in interest rate cuts are passed on – as amid the credit crunch lenders are reticent to pass on full cuts, despite government pressure.

Analysts now point to an interest rate cut in June and later in the year.

“We anticipate that interest rates will fall to 3.75 per cent by early 2009 as extended below-trend growth increasingly undermines companies’ pricing power and limits wage growth,” said Howard Archer at Global Insight.

He went on to predict the economy’s growth would slip to 1.6 per cent in 2008 and 1.4 per cent in 2009, thus providing scope for the Bank to cut rates as with a slowdown inflationary pressures usually ebb.

“With signs growing that the UK economy is slowing markedly in the face of major headwinds and credit conditions remaining very tight, the Bank of England is under serious pressure to cut interest rates,” said Mr Archer.

“The minutes of the April meeting also highlighted the MPC’s ongoing very difficult position as it faces serious downside risks to the growth outlook but also current elevated inflation pressures.

“The committee is currently particularly concerned that current elevated inflation levels - primarily resulting from higher utility and food prices, as well as a markedly weaker pound - could lift inflation expectations and thereby have significant second round effects through affecting the behaviour of price and wage setters.”