Merv gives rate cut the swerve

Bad news for mortgage holders - the Bank of England's decided against another interest rate cut.

Last Updated: 31 Aug 2010

The Bank voted to hold interest rates at 5.25% this morning, to nobody’s great surprise. Although its US equivalent the Federal Reserve has been cutting rates faster than the Lib Dems have been shedding front-benchers recently, the Bank’s Monetary Policy Committee has clearly decided to take a more cautious approach.

Inflation is still the big worry for Governor Mervyn King and co, and the reason why they’ve chosen to sit on their hands for another month. With commodity costs at record levels (it was coffee’s turn in the spotlight today, for example), our food and energy bills are on the rise – and it looks as though there’s no sign of this changing any time soon. This is bad news all round, both for consumers and for the businesses that rely on these raw materials – not least because it raises the unfortunate prospect of that horrible term ‘stagflation’ (slow economic growth coupled with high inflation and unemployment) coming into common parlance…

The latest figures from the Chartered Institute of Purchasing and Supply, released yesterday, will probably have been the clincher this week. The CIPS found rising costs but strong growth in the service sector, which suggests that cutting rates at this point could well do more harm than good.

The argument’s not completely cut and dried, of course. The Royal Institute of Chartered Surveyors said today that the number of buy-to-lets fell towards the end of last year for the first time in a decade. And the latest of these incessant reports on the housing market – this time from mortgage lender Halifax – shows that house prices dropped a further 0.3% in February, sending annual price inflation sinking to 4.2%.

But even Halifax didn’t sound too gloomy this morning. It thinks the Bank’s previous rate cuts have helped to stem the house price slide, and insists that the market is ‘supported by sound economic fundamentals’. Clearly mortgage lenders don’t want to be talking down the housing market too much, but that still sounds pretty positive to us.

Now, time for a cup of weak coffee.

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