Bank of England keeps interest rates on hold

10th March 2011

Commentators are now increasingly divided on the future movement of interest rate. Today's vote is likely to have been a split vote and the decision on whether to raise rates or not hinges on how the economic data appears in the coming months as well as events in the Middle East which impact oil and petrol prices.

Some forecast rises as early as April or May, whereas others predict the MPC will hold off on any rises until next year.

 "In the short term the recent rise in the oil price, coupled with the much greater than usual short term uncertainty about the pricing impact of events in the major oil producing regions, increases the challenge facing the MPC," says Ray Boulger of mortgage broker John Charcol. "One must now expect inflation to peak even higher than looked likely only a month ago. However, the impact on consumer spending of higher pump prices is similar to the impact of higher interest rates and so for the MPC to impose an avoidable double whammy on consumers by increasing bank rate would make no sense."

Meanwhile a survey by Moneysupermarket found that 42% of homeowners are worried about how future rate rises will affect their mortgage repayments and overall finances.

A base rate rise of just 0.5% would mean a £44 per month jump in mortgage payments for homeowners with a £150,000 variable repayment mortgage on an average 4.74% SVR. If the base rate rises by 1%, their monthly repayments would leap up by £88, representing a huge hit to their finances.

Kevin Mountford, head of banking at moneysupermarket, says: "Reducing the base rate at a time when the country was at the beginning of the credit crisis was the right thing to do at the time as it freed up vital money to help stimulate the economy. Many consumers have taken full advantage of the fall in mortgage payments and have absorbed these savings into every day living costs. However, the danger is, when rates rise, which they will do sooner rather than later, many people will find they don't have the spare cash to fund the increases in their monthly payments."

For people looking for a new mortgage and unsure about whether to opt for a variable or fixed rate, Andrew Montlake of mortgage broker Coreco says that many of the expected future rate rises are already playing out with lenders increasing their fixed rate products on a regular basis.

"Whether we see increased competition returning to the mortgage market to offset these rises is unlikely in the short-term," he says, "Fixes at 2.65%, (4.24% APR) for two years, 3.49% (5.99% APR) for three years and 3.95% (4.0% APR) will no doubt not be around for long."

See also: Risk of a Rate Rise – A ‘War on Two Fronts’

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4 thoughts on “Bank of England keeps interest rates on hold”

  1. Anonymous says:

    Kim – you have hit many nails well and truly! From what I gather, the negative side always gets the promotion (in the press etc). I fully support your final statement – pay bonuses (or whatever you wish to call them) IF and only IF you can show that you as a banker have contributed positively to the well-being of another (individual, householder, company) and can prove it not by YOUR questionable figures but by 180 degree feedback from those you have actually helped! Great article. Thank you. 

  2. Anonymous says:

    Thanks, some reasonable points you make but the pyschology you describe breeds in a too-big-to-fail perversion of business where losses are socialised. It strikes me that responsibility for failure is, in this industry, insidiously and cleverly massaged away. So, I agree that clever people finds ways to step around rules. Why not therefore pursue public regulation ( because taxpayers are being made use of) and an institutional reform of the way banks are run utilising ‘personal liability’. A bit like health and safety legislation which prevents company officers hiding behind the corporate veil and allows creditors and shareholders to access individuals in the event of systemic risk materialising. Thus, the alpha male watches his back…

    1. Kim says:

      I sort of agree, but maybe there are a coupe of other points.  The system you’re suggesting would work if people actually worked on rational cost/benefit analysis, if the risk materialising was accurately calculable in advance and if gambling never paid off.  Big subject, but basically:

      Imagine you’re a trader.  All the top men make a fortune and are Gods (Goodwin, Diamond etc.)  The way to get that status is make money.  Since nobody really knows what the risks are (wasn’t LTCM the result of a Nobel Prizewinner and a top trader predicting markets?) you get stuck into trading. You break a few rules to try to win more.  If you gamble and win, you get status, if you gamble and lose, you are no worse off.  They can come after you for billions, you do your time and, like Nick Leeson, you write your best seller so you have fame (infamy) and money.  Where’s the downside? 

      Meanwhile, they lock and bar the stable doors you went through.  The next guy simply digs a hole in a different place.  The regulators can’t legislate for everything, the poachers always have the initiative over the gamekeepers.

      So regulating and making people accountable is fine for revenge, but it doesn’t change the motivation – you can send them all to gaol, but if you leave the incentives and system the same, a new round of people will arise and do exactly the same things, because the people who will be attracted to the job will be motivated by the same incentives, and those incentives will lead them to gamble where the costs are met by others.

  3. Yes, i think but the effect was the same and the “don’t pay commission” claim is no more convincing than the “non-bonus” argument. If you call it, “excellent service award”, “productivity related payment” or, indeed “backhander for being greedy”, it isn’t a bonus is it? What’s in a name

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