Articles > Rates Unlikely to Change

Towards the latter half of last year, August to be precise, the Bank of England’s Monetary Policy Committee (MPC) decided to cut interest rates by a quarter of one percent, taking the base rate to 4.5%. This helped, as intended, to keep the consumer price index (CPI) to its two-percent inflationary target, however many experts and indeed retail associations began voicing calls for a further rate cut in the last quarter of 2005 due to low consumer spending and a struggling manufacturing sector.

The MPC took the decision to keep rates on hold despite these calls as its focus is on the CPI, and maintaining that as close to the target of two percent as possible. The base rate of interest has remained unchanged since August, and despite a pickup in consumer spending, there are still many who feel that a cut in rates is needed.

While in the closing months of last year a rate cut did look as though it could be just around the corner, the economic climate has changed somewhat and it now looks unlikely that we will see a cut in rates in the near-term.

The main reasons for this are the strengthening in consumer spending that took place over the Christmas/January sales period (although this was not as strong as retailers were hoping for), and in particular the increase in house sales. The housing market began to pick up in November, following something of a slump, and December saw unexpectedly high levels of sales. This activity has continued through with the first two months of this year seeing high levels of demand, so much so that estate agents are short on stock on their books, and prices have started to rise as a result.

When deciding on what level interest rates should be set at, the MPC takes into account a number of factors, and one that has a large influence on their decision is the state of the housing market. The recent surge in house purchase, and the increase in prices will mean the MPC will be reluctant to cut interest rates, and so it appears as though rates will remain the same for the near future.