Bank Of England Keeps Base Rate Unchanged

The Bank of England’s monetary policy committee (MPC) has voted to keep interest rates at 5.75 per cent for the duration of September, it has emerged.

At its monthly meeting in London, the committee decided to keep the base rate of borrowing consistent for the second consecutive month following the hike of 0.25 percentage points actioned in July. In a statement released today (September 6th), the Bank claimed that the disruption seen in the financial market, caused in part by the sub-prime crisis in the United States, meant that it was too early to increase interest rates as it continues to assess how recent events could impair the availability of secured loans and other forms of credit to both companies and individuals.

Commenting on the announcement, David Kuo, head of personal finance at the Motley Fool, claimed that although the news was “not completely unexpected” due to recent turbulence in the financial markets, borrowers should take advantage of the hold by making as many overpayments as soon as possible into loans  and other types of borrowing, should another rate rise take place.

He said: “Homeowners can draw some comfort from the Bank’s decision to leave interest rates unchanged. In fact, there have even been suggestions that the Bank may cut interest rates to avert a slowdown in the economy. However, a recent report from the Bank of England suggests that a rate cut in the near future is unlikely given that five interest rate hikes in the last year have failed to dampen demand from consumers to borrow more.

“But whatever the Bank does in terms of future interest rates, borrowers can take active steps now by overpaying their loans today. While the Bank of England involves itself in complex economic analysis, consumers should instead stick to simple arithmetic. This states that every pound you overpay on your loan will go to decrease the amount borrowed rather than go towards interest payments.”

Meanwhile, Trevor Williams, chief economist for Lloyds TSB Corporate Markets, claimed that a rise would not have been suitable given the current economic climate. He pointed out that banks have been increasingly cautious about lending money to one another, which in turn has seen them steadily increase their interest rates. Consequently, Mr Williams suggested that the MPC hold would be the best way in which to get these rates to fall.

The economist asserted that interest rates are likely to have reached their peak, pointing to a “cooling” property market, a slow in earnings growth and falling inflation as various indicators that the committee will not look to raise the rate of borrowing in the near future. However, Mr Williams added that the MPC is likely to wait for the “pain” of the recent credit crisis to ease before deciding on whether to adjust the base rate, with any moves unlikely to be “for a while yet”.

Although the committee has voted to keep the base rate consistent, which is likely to be welcomed by borrowers as their level of monthly repayments will stay the same, consumers should not take too relaxed a view about the importance of paying back loans. Earlier this year, a study carried out by MoneyExpert.com showed that more than 1.38 million loan repayments have been missed during the first six months of 2007. Chief executive Sean Gardner claimed the figures act as “another warning” of the financial stress being felt by consumers across the country.

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