Bank of England holds Bank Rate at 0.5%

The Bank of England’s Monetary Policy Committee yesterday voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%.

Rises in the base rate of interest affect rates paid on variable credit cards, loan and mortgage interest, so the freeze will be welcomed by the majority of consumers, particularly those struggling with debt.

Commenting on the decision, Brigid O’Leary, Royal Institute of Chartered Surveyors (RICS) senior economist said:

“The Bank of England’s commitment to complete the next £25bn of asset purchases within the next month suggests that the August MPC meeting, coinciding with the release of an Inflation Report, may be a more appropriate time to consider increasing the asset purchasing programme further.”

“There has been some disappointment that the asset-purchasing scheme has not yet transpired into a more significant improvement in lending. However, it would be premature to declare that the scheme has been unsuccessful given that corporate bond yields have come down materially since the introduction of the programme.”

“As far as the housing market is concerned, mortgage finance is still in short supply and is likely to remain so for some time. That is partly due to a limited deposit base for lending. But also, lenders risk aversion will keep loan to value ratios generally low, not withstanding special rates such as the Nationwide’s 125% mortgage announced earlier. It’s not clear that an extension of the asset purchase programme will expedite an improvement in the mortgage market.”

The Committee also voted to continue with its programme of asset purchases totalling £125 billion financed by the issuance of central bank reserves, stating:

“The Committee expects that the announced programme will take another month to complete. The Committee will review the scale of the programme again at its August meeting, alongside its latest inflation projections.”

Ray Boulger of UK mortgage broker John Charcol said:

“As early signs of some recovery in the economy are now looking less certain the likelihood of Bank Rate remaining low for longer is increasing, whereas the medium and long term fixed rate markets are now discounting a relatively early increase in rates. There has been little change in the cost of tracker mortgages over the last month and as a result the initial gap between the cost fixed rate and tracker mortgages has widened considerably.”

“For anyone who believes Bank Rate will remain low, say under 2%, for at least 3 years there is now a strong argument for considering a tracker mortgage in preference to a fix, ideally retaining the ability to switch to a fixed rate if rates on fixes fall back. This will mean either buying a tracker with no, or low, early repayment charges (ERC) or one which offers a droplock option, allowing a switch to a fix without incurring the ERC.”

If you would like help identifying the best mortgage deal for you, visit http://www.totallymoney.com/mortgages/. Just enter your details and we will compare the entire UK mortgage market to produce a no obligation quote.