Reaction to Bank of England interest rate freeze

Today the Bank of England held interest rates at 4.5 per cent for the fifth consecutive month.

Whilst widely expected, the decision was met with criticism by the industry - many of which are calling for a cut in interest rates to make credit cheaper and boost the property market and help out with spending on the high street.

The Bank's interest rate setting Monetary Policy Committee (MPC) raises and lowers the base rate of borrowing in the UK - affecting millions of mortgages and savings accounts - in an attempt to keep inflation as close as possible to the government's two per cent target.

And the MPC seems content to wait for the full data on Christmas sales and wage settlements before making a decision and with the property market stronger than it has been for some time, analysts are split on when, or indeed if, rates will fall again.

But many feel that it should act now, or at least in the near future, in order to underpin the economy.

"This month many will be left wondering why, once again, the MPC has decided to keep the lid on rates, when for some the arguments for a decrease seem so overwhelming," said Trevor Williams, chief economist, Lloyds TSB Financial Markets.

"Manufacturing remains in recession; overall economic growth is below its long run average; retail sales have been subdued (despite a brief respite over Christmas) and unemployment continues to increase. So, the question is, why hold?"

He felt the decision to hold interest rates was probably due to the recent improvement in the property market and the service sector's recent resurgence.

"The trick for the Bank of England will be to stimulate a rise in house prices which is modest enough to help consumer spending but which prevents the return of a another boom that could be potentially destructive for the economy," Mr Williams added.

"So while the arguments for a cut in rates have undoubted merit, the case for holding remains as robust as ever."

Others felt the recovery in the property market - which underpins a good deal of consumer confidence - was fragile, and needed support.

David Bexon, managing director of SmartNewHomes.com felt that a rate cut would be coming soon.

He said: "UK house prices may be coming out of the doldrums of 2005, but unless the Bank of England sees fit to cut interest rates by at least a quarter of a per cent in the early months of 2006, the market will be making a hasty return to inactivity and stagnation.

"Mixed reports of consumer spending levels over Christmas and into the New Year have done little to bolster confidence in the country’s economy and many homebuyers will be awaiting further reassurance before committing to a move. It is widely accepted that a cut in the base rate will be unavoidable before too long and it certainly would not be out of the interests of the wider economy were that cut to come sooner rather than later."

And business in general seems less than impressed with the decision to keep rates frozen.

David Frost, director general of the British Chambers of Commerce (BCC), noted: "British business is disappointed that the MPC's felt unable to take firm action to counter the downward pressures on the economy. We understand that the MPC faces major uncertainties. But we reiterate that waiting too long before taking corrective action could be dangerous, and could cause long-term damage.

He added: "We strongly urge the MPC to act without undue delay."

Ray Boulger of independent mortgage adviser John Charcol, felt a interest rate cut was on the cards: "I expect to see at least two quarter point reductions in base rate this year and house prices to rise by about 5.5 per cent.

"The housing market is a critical driver for the economy and, whilst a lower base rate is likely to be needed to improve consumer confidence, base rate at or a little below four per cent should not cause overheating of the housing market."

He predicted that the MPC would cut interest rates in February or March, with another to follow halfway through the year.

But not all commentators are agreed.

The Royal Institution of Chartered Surveyors (Rics) was not sure that interest rates would fall at all.

"Rics sees little reason for the Bank of England to rush into cutting interest rates further in the next few months, unless there is a renewed deterioration in high street spending," it said in a statement.