Interest rates: BoE opts to stick

They are staying put at 5%. That's news that won't please the housing sector.

Last Updated: 31 Aug 2010

The Bank of England announced today that it would stand firm and hold interest rates at 5%, a largely anticipated decision motivated by the pace of inflation – which was pushed to 3% in April by rising food and fuel prices. Experts had urged the government to hold firm and see whether prices lead to higher wages or lower spending elsewhere before getting involved. Indeed, at the Monetary Policy Committee meeting last month, only one of its nine members voted to cut rates.

But the decision to not meddle has not been easy. While assailed on one flank by rising prices, Bank of England governor Mervyn King also has to stave off the effects of a slowing economy and falling house prices on the other. There have been several grim reports recently, on everything from the manufacturing sector: stalling; to the service sector: contracting. Meanwhile the UK’s housebuilders are warning that without a half-point cut in interest rates, there’s a strong risk that an imploding property market could spark a recession. Better buckle up for that one then.

According to news from Bellway, the North and the Midlands are really suffering. The country's fourth-largest housebuilder has slashed its sales forecast after seeing a 31% drop in reservations since February, compared with last year. Meanwhile the Halifax has reported house prices falling at a faster rate than during the last major recession, in the ’90s. It said prices fell by 2.4% in May, wiping almost £5,000 off the value of the average house. Prices have fallen by around 6.5% in the last three months.

First-time buyers may be able to smile, at least if they can find someone willing to give them a mortgage, but a lot of others will be feeling the pinch. Not least Merv and his cronies.

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