Bank of England freezes interest rates

The Bank of England is to freeze interest rates at five per cent for May, the central bank has announced.

Despite pressures from a slowing economy and the high cost of borrowing due to the credit crunch, the rate-setting monetary policy committee (MPC) has opted to hold the base rate after last month's cut.

High in the MPC members' minds has been the danger inflation presents to the economy.

Food and oil prices are continuing to rise – with reports suggesting the cost of oil could eventually pass $200 a barrel - and further interest rate cuts will add to this burden – as lower borrowing costs tend to spur consumer spending.

Brian Murphy, head of lending at the Mortgage Advice Bureau, said: "The MPC’s decision to maintain the base rate at five per cent this month comes as no great surprise.

"If a cut were to be imposed, it would have made more sense to reduce the base rate by a half point in April."

He went on to explain the credit crunch was now set to continue.

"It remains likely that would-be borrowers will have to wait a while longer for lenders to regain their appetite for new business," Mr Murphy said.

"However, it is hoped that the Bank of England’s recent £50 billion collateral swap will give the market the liquidity boost that it so desperately needs."

Ray Boulger, at mortgage adviser John Charcol, said: “This pause in the programme of rate cuts will allow the MPC time to assess the impact of its Special Liquidity Scheme available to banks and five building societies before deciding on the scale and timing of further cuts."

He explained so far the effect on the Libor interbank lending rates – which determine the cost of deals for borrowers – was muted.

"Although the Libor has edged down to 5.79 per cent, the lowest since Bank rate was cut to five per cent last month. This compares with the recent peak of 6.01 per cent but the Bank rate/3m Libor spread remains exceptionally high."

Mr Boulger went on explain although the expectation is for interest rates to fall in coming months, most borrowers are opting for fixed-rate deals.

"At this stage of the interest rate cycle trackers normally make most sense for borrowers who don’t need or want the protection and security a fixed rate mortgage offers.

"However, because lenders generally have increased tracker margins above Bank rate by more than they have increased fixed rates the choice is not so obvious at present."

He added anyone who believes Bank rate will average no more than 4.5 per cent over the next few years and is prepared to back that judgement will probably favour a tracker, but at present the majority of borrowers are choosing fixed rates.

Borrowers now have to balance the need to take advantage of falling interest rates while looking for stability – as a good short-term deal may be a poor move if the conditions in the mortgage market deteriorate and borrowers are left high and dry when trying to remortgage.

"An ideal compromise would be a long-term deal, perhaps a lifetime tracker, with no early repayment charges, but few lenders still offer such deals," Mr Boulger said.

"As an alternative a three year deal should be long enough to see conditions in the mortgage market better than those of today, even if they have not returned to normal by then.”

New figures from the Council of Mortgage Lenders (CML) show most homeowners will not feel the benefit of an eventual rate cut.

Around half of borrowers are now on fixed rate mortgage deals, and only a quarter of mortgage holders are on tracker deals directly linked to the Bank base rate.

However, those on standard variable rates will have to wait to see if any future interest rate cuts are passed on – as amid the credit crunch lenders are reticent to pass on full cuts, despite government pressure, as their costs are linked to the high Libor.

Daniel Barnes