It was fairly inevitable wasn’t it?
The Bank of England has held interest rates at 5% for July as the UK economy worsens.
More bad economic news broke this week, showing house prices plummeted 2% in June while inflation is at an all time high since the Bank of England started setting interest rates in 1997.
Despite the consumer spending slowdown and the housing slump, the committee was not persuaded to give the economy a boost by cutting rates.
The Bank of England (BoE) is charged with keeping inflation as close to 2% as possible but it also has to keep the wider economy on track.
But its a tricky situation right now; this is because if inflation rises, so do interest rates. Higher rates make borrowing less attractive and encourage saving. This generally acts as a brake on the economy as we reign in spending and try and save more.
However, if the economy slows, (making borrowing cheaper and saving less worthwhile) it means we are more likely to spend cash; this boosts growth.
Right now the credit crunch is making borrowing more expensive regardless of what the BoE does. This is slowing our economy and hitting house prices; but rather than a slowing economy dragging inflation down, international oil and food prices have driven up inflation.
This rising inflation and a slowing economy is making it hard for banks around the western world.
Most economists successfully predicted that the Monetary Policy Committee (MPC) would keep interest rates level at 5% this month.
The MPC seems to be taking the view that inflation (driven by rising global costs and not domestic demand) cannot be brought under control by increasing the base rate and will go away eventually. Also any action to increase the cost of borrowing would hit us the consumer hard (with mortgage costs already at eight-year highs) so upping interest rates could prove catastrophic to the economy.
Philip Shaw, Investec chief economist said:
"The Bank remains trapped between rising inflation and inflation expectations on one side and a sharply deteriorating economy on the other. The growing threat of recession should mean that the next move is down, probably next year."
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- How does this affect you?
Mortgages
An interest rate freeze means that if you have a tracker mortgage you will see your repayments unchanged for the next month. If you are on a fixed-rate mortgage there will be no change until your current deal expires.
If interest rates start to fall, it could be time to move to a tracker or discount mortgage. This means your deal becomes cheaper when rates fall, but also more expensive if the base rate rises again.
However, variable rate, discount rate and capped-rate mortgages are not required to move with the Bank of England's rates. These rates change in line with your mortgage lender’s internal rates.
This means interest rate cuts might not be passed on and your mortgage rate can rise even if the Bank of England leaves rates the same. Only tracker mortgages are required to move in line with the Bank of England rate.
As more of you have switched your mortgage, more lenders have increased or introduced new fees. So, you need to consider all the costs involved when remortgaging, not just the headline interest rate.
Savings
If you are a saver then are benefiting from the all the interest rate rises since August 2006, as well as from the credit crunch, and if you are not earning at least 5% you should switch.
The best instant-access savings accounts are paying over 6% at the moment, and you can get 6.5% on some notice accounts.
Recently, its been good news for you if you are a saver as banks compete to draw in your money. Any possible interest rate cuts in the months ahead should not affect this situation too drastically.
So, bearing in mind how the Bank of England has to juggle both inflation and the state of the economy, do you think they have made the right decision on interest rates?
Why not let us know in the comments?
No surprise. No change in interest rates. With the state of the economy and rising inflation, we find out how much this affects you.