UK interest rates remain at 0.5%

7 July 2011 Last updated at 14:05 GMT UK interest rates have now been held at 0.5% for more than two years The Bank of England's Monetary Policy Committee (MPC) has kept UK interest rates on hold at a record low of 0.5%.

Economists had expected no move in rates because the latest data has shown the UK economic recovery remains weak.

The committee's decision comes despite the annual rate of inflation remaining at 4.5% in May, well above the Bank's 2% target.

The Bank also kept its programme of quantitative easing unchanged at ?200bn.

The MPC is split over which is the greater problem, the weak economy, which recent data suggests has slowed from the 0.5% growth of the first quarter, or inflation, which is squeezing consumers' purchasing power.

The National Institute for Economic and Social Research's latest forecast suggests the UK economy barely grew in the second quarter of year.

It predicts growth of 0.1%, below other recent estimates which predict a rise of 0.3%.

The first official estimate for second quarter gross domestic product (GDP) will come on 26 July.

Some members of the committee would like interest rates to rise, to head off the risk of inflation accelerating.

Savers would also like to see rates go up. One lobby group, Save our Savers, says that the value of UK savings has been eroded by ?50bn in the past year because of inflation and low interest rates.

Manufacturing rebound

Other MPC members believe that government cutbacks and tax rises will lead to lower inflation by further curbing consumers' spending power, and that energy prices, a large part of the inflation problem, will naturally start to fall back.

Earlier on Thursday, official figures on UK manufacturing showed output had jumped by 1.8% in May, although this followed a 1.6% drop the previous month when output was disrupted by public holidays around the royal wedding and Easter.

There has been a run of bad news from the High Street recently, with Habitat, TJ Hughes, fashion chain Jane Norman, and kitchen and bathroom company Homeform all having gone into administration.

There is also the prospect of higher energy prices. Scottish Power has said it will increase gas prices by 19% and electricity bills by 10%, and its rivals are expected to announce similar rises.

The chief economist of the British Chambers of Commerce, David Kern, backed the decision not to change rates.

"Tightening policy in reaction to higher utility prices and internationally generated inflation would be a major mistake," he said.

"Premature rate increases, at a time when the government is tightening fiscal policy through its deficit-cutting programme, could damage jobs and growth and should be avoided."

Lee Hopley, chief economist at the EEF manufacturers' organisation, said: "The decision for no change was a sure fire bet.

"Inflation may still be uncomfortably high, but the outlook hasn't materially shifted. On the growth front however, there are now some emerging signs of weakness at home and abroad."

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Mortgage market 'to remain flat'

20 June 2011 Last updated at 09:33 GMT The housing market has seen relatively little activity in recent months Lenders expect activity in the mortgage market to remain flat in the coming months, despite a rebound in May.

Gross mortgage lending in the UK totalled an estimated ?11.3bn in May, up 12% from the previous month, the Council of Mortgage Lenders (CML) said.

The figure was 1% higher than in May 2010, but the lenders' group said the market remained relatively subdued for house buyers.

The CML said it expected no significant upturn soon.

The figures come as the government unveils more details about its Firstbuy scheme.

The shared equity scheme aims to help 10,000 first-time buyers get on the property ladder if they buy newly-built homes.

Remortgaging

The CML's gross mortgage lending figures include loans for house purchases and remortgaging.

The total in May returned to the same level as it had been in March.

"Lending in May recovered after low activity levels in April," said CML director general Michael Coogan.

"Distorting effects from Easter and bank holidays cloud the current picture, but the likelihood seems to be for essentially flat levels of lending over the next couple of months."

However, he said that home loans for house purchases were lower than a year ago. The pick-up in remortgaging, seen in recent months, was also running out of steam as expectations of an interest rate rise this year receded.

Jonathan Samuels, chief executive of Dragonfly Property Finance, said: "Competition and appetite among lenders is returning but they are still very conservatively minded, as indeed are borrowers in the current anxious economic climate."

Pledge

Separately, details of the developers and lenders potentially to be involved in the government's Firstbuy scheme have been released.

Continue reading the main story Only available to first-time buyers purchasing a newly-built homeBuyer offers 5% deposit with additional equity loans provided by the housebuilder and the governmentFunding for the scheme will only be provided by the government for a yearThe project, announced in the Budget in March, will see loans offered to some first-time buyers purchasing a newly-built home.

Buyers must save a deposit worth 5% of their property's value, with the government and housebuilders putting up 10% each through an equity loan, enabling people to qualify for a 75% loan-to-value mortgage.

The equity loan would be interest-free for the first five years, with interest charged at 1.75% in year six, and at inflation plus 1% thereafter.

Housebuilders expected to take part include Persimmon Homes, Barratt Homes, Bovis Homes, CM Yuill Limited, Galliford Try Homes, Morris Homes Limited, Radian, and The Miller Group.

Lenders expected to take part include the Halifax, Nationwide Building Society, Barclays and the Melton Mowbray Building Society, according to the Department for Communities and Local Government.

The government's ?250m pledge, funded from a levy on the banks, will only last for one year. Of this, ?210m will be spent in England, with the rest spent in Wales, Scotland and Northern Ireland.

The scheme is less generous than the previous government's HomeBuy Direct scheme, which was considered a success by housebuilders.

The introduction of Firstbuy has not altered the CML's forecast for a relatively flat mortgage market.

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UK interest rates remain at 0.5%

9 June 2011 Last updated at 15:08 GMT Simon Gompertz reports as the Bank of England announces that interest rates will remain at 0.5%.

UK interest rates have been kept at the record low of 0.5% again by the Bank of England's Monetary Policy Committee.

Economists had expected the decision, as recent data has underlined worries about the strength of the UK's recovery.

The decision comes despite the annual rate of inflation rising to 4.5% in April, up from 4% in March, and well above the Bank's 2% target.

It is the 27th straight month that the bank has left rates unchanged.

Meanwhile, the European Central Bank's president, Jean-Claude Trichet, has signalled that its interest rate could rise next month.

The ECB on Thursday held rates at 1.25%, but Mr Trichet said the bank would maintain "strong vigilance" on inflation - widely interpreted as a signal to the markets that rates will be raised at the next meeting.

James Knightley, economist at ING, said that continuing high UK inflation also made a rate rise by the MPC likely this year.

Continue reading the main story

I would say... that it means that we are in a mode where there might be in the next meeting an increase of rates”

End Quote Jean-Claude Trichet President, European Central Bank Poor UK economic data has led some economists to "push back expectations for the timing of the first UK rate hike to March next year", he said.

"However, with inflation likely to move above 5% in the next three to four months on the back of rising utility bills and food prices and with employment and employment intentions surveys remaining firm, we feel that the balance of probabilities favours an earlier move," he said.

Economists say policymakers face a difficult choice: keep rates on hold to help the economy, or raise them to cool inflation.

But higher rates increase the cost of borrowing, and there are concerns this may hurt the economic recovery.

Lee Hopley, chief economist at the EEF engineering employers' group, said weak UK growth and financial troubles in the eurozone meant it was "still too early for a rate rise".

Low returns

The record low Bank rate has led to relatively small returns for savers.

The latest statistics from the Bank of England show that, at the end of May, the average rate of interest with an instant access bank or building society account was 0.3%. This has been unchanged since a slight rise at the start of the year.

For cash Individual Savings Accounts, the average interest rate was 0.55%. Three years earlier, this had been 4.56%.

However, as long as the Bank rate is low, borrowers - especially those with variable rate mortgages - are seeing relatively low home loan repayments.

The BBC's Declan Curry looks at why interest rates matter

'Stalemate'

Although the Bank was expected to leave UK rates unchanged, some members of the MPC have been urging an increase.

At the MPC's meeting in May, policymakers voted six to three in favour of keeping rates on hold.

It was the fifth month in a row that three members had voted for a rise.

Former MPC member Andrew Sentance had persistently voted for rate rises, but stepped down last month and was replaced by Ben Broadbent.

Lee Hopley said it would be interesting to see if Mr Broadbent had shifted the balance of views when the MPC's minutes are published later this month.

Andrew Smith, chief economist at KPMG in the UK, said he thought there was a "stalemate" between those who wanted to raise rates to tackle inflation and those who feared it could stifle recovery.

He said he thought that the impasse was likely to continue for the rest of the year.

"With the fiscal squeeze now starting to bite and the chancellor emphatically ruling out a U-turn [on spending cuts to tackle the deficit], the prospects for the recovery will remain under a cloud, while on the Monetary Policy Committee's own forecasts inflation is yet to peak.

"It may well be 2012 before the stand-off is resolved," Mr Smith added.

The MPC did not reveal any new quantitative easing measures.

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