March 2007 - Bank of England base rate stays unchanged at 5.25%

By: Darren Ferneyhough

UK interest rates have remained unchanged at 5.25% by the Bank of England's Monetary Policy Committee.

While it is welcome news for borrowers this month, many in the City still expect there to be another rate rise in the near future.

UK inflation dropped to 2.7% last month, down from an 11-year high of 3%, yet it is still beyond the target of 2%.

There have been 3 rate rises of a quarter point each since last summer: in August, November and January. A number of homeowners with luck or foresight on their side were canny enough to already have fixed rate deals in place on their mortgages, and following these rises the demand for fixed rate deals increased further.

Michael Cooke, senior partner at homeowner loans specialist The Loan Helper commented "It is a good thing that a number of homeowners have been prompted to put fixed rate mortgages in place to protect them from the higher cost of increases in the base rate in the future."

An increase this month had been seen as unlikely by many, after the minutes from February's meeting suggested that the Monetary Policy Committee's members wanted to wait and see the effect that the increases so far had had.

"The gist of the minutes to February's meeting was that the MPC really had time to sit and wait, to assess evidence to see whether upward risks to inflation were crystallising," noted Philip Shaw, economist at Investec.

Inflation figures are to be released later than usual this month, on March 20th, so the MPC are not likely to have been given a chance to them.

The committee is also likely to have been keen to know what is in the Chancellor's budget on 21 March before increasing rates again.

The Bank of England recently indicated that rates might need to rise again, to keep inflation below its long-term target of 2%.

"I think there is some uncertainty about when the next rate rise will be, but April or May will become the favoured choices," noted BNP Paribas UK economist, Alan Clarke.

Such speculation will further fuel the rising demand for fixed rate deals on mortgages & remortgages, Michael Cooke further commented "of course, homeowners often need to raise further funds from time to time, and for those who have already secured a fixed rate, a remortgage often does not make financial sense compared to a secured loan which often serves their needs much better by keeping that great fixed rate mortgage deal in place, yet still utilising available equity to secure a low rate loan to provide the funds required."

The minutes from this month's MPC meeting are to be published on the morning of Budget day.

There is likely to be substantial interest in whether the voting has changed from February's 7-2 result in favour of keeping rates unchanged.

Some people also believed that the recent falls on global stock markets meant that a rate increase was less likely.

Economic adviser to the British Chambers of Commerce, David Kern said: "Given the worsening global risks, highlighted by the acute turmoil on the international financial markets, an early hike in rates could have very harmful effects on business confidence and on the economy's growth prospects."

EEF, the manufacturers' organisation, also welcomed the decision not to raise rates.

"EEF believes that two of the Bank's stated fears, an escalation of earnings growth and firms pushing through significant price increases, have yet to materialise in any substantive fashion," it said.

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Darren Ferneyhough is a partner in The Money Helper and a respected commentator on a number of subjects in the UK financial services market. Darren currently writes for Loan-Sense and Mortgage-Sense as well as being instrumental in the design and strategy of the consumer loans site The Loan Helper

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