MPC: Greek uncertainty holds Bank Rate

All members of the Monetary Policy Committee voted to hold Bank Rate at 0.5% at the most recent meeting.

Related topics:  Finance News
Rozi Jones
22nd July 2015
bank of england boe

However the MPC revealed that for a number of members, the balance of risks to medium-term inflation relative to the 2% target was becoming more skewed to the upside at the current level of Bank Rate. For these members, the uncertainty caused by recent developments in Greece was a very material factor in their decisions: absent that uncertainty, the decision between holding Bank Rate at its current level versus a small increase was becoming more finely balanced.

There was a range of views among Committee members on the significance and scale of the news regarding domestic costs, external price pressures and the balance between them. It was evident that domestic cost growth was recovering. But there were questions regarding: whether the increase in wages relative to productivity would be sustained in light of the risks to global and UK activity emanating from developments overseas; and whether or not increases in domestic costs were occurring sufficiently rapidly to offset the probable drag on CPI from the appreciation of sterling and so return inflation to the target within two years.

For most members, even before accounting for the recent increase in uncertainty in the external environment, the current stance of monetary policy remained appropriate to balance the risks of inflation around the target in the medium term.

Jeremy Duncombe, Director, Legal & General Mortgage Club, commented:

“Although the committee voted unanimously against a rise, we don’t expect the same to happen again in future months. Members have hinted that they are likely to ramp up the pressure to change the base rate in the remainder of the year, as inflation and the wider economy are projected to gain momentum in the coming months.

“The fact that rates have stayed the same for six years may have driven many borrowers into complacency when it comes to seeking the best deal for them. Someone on their lenders SVR with a £150,000 loan and a 40% deposit, for example, could save over £4,000 per year. The savings are even greater the bigger the loan, so savings are there to be had across the whole market. It’s crucial that brokers bring the prospect of upcoming rate rises to the attention on their clients, so that they can make the most of record low rates and effectively give themselves a pay-rise before it’s too late.”

Ben Thompson, Managing Director, estateagent4me.co.uk, added:

“The minutes from July’s MPC meeting show all members are still voting to keep the base rate at 0.5%. However, Mark Carney’s comments last week show that an interest rate rise may well be on the cards for Q1 2016. As deflation falls away, it is also possible that one or two members will start voting for an increase as early as this year.

“Although any actual increase in rates is still some way off, the promise of a rise may start to impact the housing market as we move into autumn. Historically as interest rates have risen, house prices have flattened or even fallen.  Increases in mortgage costs often slow the pace of the market, as borrowers put off moving house.

“This potential market slump will make it more vital than ever for consumers to pick the right estate agent for them. Whether location, time to sell, or price is the most important factor, homeowners need to be able to make an informed decision. Our recent Estate Agent Performance Index showed that the average house seller could have received an extra £27,456 on the sale price of their property had their estate agent performed as well as the best. This is a huge sum of money, especially as for most people their house is by far their biggest asset. Getting the best sale price in a timely manner will still be a priority for many, regardless of whether the MPC moves to increase rates this year or next.”

Nicola Georgiou, Managing Director at Freedom Finance, said:

“Although the Monetary Policy Committee has voted unanimously to keep rates from rising this month, recent indication from the Governor of the Bank of England, Mark Carney, is that Interest rates could finally start to rise by the end of this year. Many savers will feel relieved as they may have struggled to get any return on their money since rates dropped in 2009 following the financial crisis. However, it is important to note that mortgaged homeowners and other borrowers could see their costs increase with the rising rates.

"Even if an interest rate rise remains a few months off and could be postponed further, households should start planning for any eventualities now and think about making any big ticket purchases sooner rather than later. A wide range of financial products allow borrowers to plan for the medium term. For instance, personal loans are currently at rock-bottom rates thanks for increased competition from lenders. Sainsbury’s Bank is offering a 3.7 per cent APR on borrowings of up to £15,000. If consumers delay on taking a competitive deal now in hope for a better rate – it might be too late. However, it’s important to understand that headline rates will only be awarded to people with perfect credit scores, so make sure you shop around to find the best possible product for your individual situation.”

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