Interest rate decision "on a knife-edge"

Next week's Bank of England decision on interest rates could be balanced "on a knife-edge" according to one expert.



The Bank's monetary policy committee (MPC) has raised interest rates three times in the past five months in an attempt to keep inflation closer to its target level of 2.0 per cent, and many analysts are expecting further rate rises still to come.

January's shock rise to 5.25 per cent saw the MPC voting committee split down the middle on whether or not to increase rates, with five members for and four against.

Simon Ward, chief economist at New Star, said that another five-four split could well be on the cards thanks to strong manufacturing figures being tempered by slowing inflation.

He commented: "Solid activity data - including [the] buoyant manufacturing PMI (purchasing manager's index) - and strong business pricing plans argue for an increase, but inflation looks set to return to target sooner than forecast in the February Inflation Report, consumer price expectations appear to be moderating and wage settlements have picked up by less than feared.

"I am assuming the MPC majority will be prepared to wait for more evidence, but another five-four split looks quite possible."

Recent figures suggest that the interest rate rises have not yet had too much of an impact on the housing market, with Nationwide data showing a 0.7 per cent rise in house prices in February.

Mortgage Lending Falling

There was a fall in gross mortgage lending in September compared to August.

Lending usually falls by around 5% during the months of August and September but this year the figure was 12% much higher than normal.

A slowdown in lending levels has been expected following the interest rate rises and figures are expected to drop below those of 2006 for the first time this year not having been helped by the problems on the mortgage market

Credit Crunch Making its Mark

The 0.25% cut in the interest rate in December has given rise to some mixed reactions among lenders.

Only thirty-one providers have announced that their standard variable rates have changed and six providers have reduced their rates less than the 0.25% reduction.

With rate cuts lenders seem to be slow in announcing cuts in rates but it was considered positive that so far most lenders are giving the borrowers the full 0.25% reduction.

Some lenders have said there will be rate reductions across the variable rate range others have altered at least one account, usually those linked to base rate.

It was hoped that lenders would have offered reductions quicker than they had.

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