Bank of England HOLDS interest rates at 0.1%

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The Bank of England will keep interest rates at the current record low of 0.1 per cent despite soaring inflation as  four of the country’s biggest lenders axed their best deals or increased costs.

The decision to keep its base rate at a record low comes as the Bank cut its growth forecast to 7 per cent in 2021 and 5 per cent in 2022, from the 7.25 per cent and 6 per cent predicted respectively in August.

And the Bank said an interest rate increase was on the way as it warned gas and electricity tariff increases will see the Consumer Prices Index (CPI) leap from 3.1 per cent to 4.5 per cent by November and hit around 5 per cent next April – its highest inflation forecast for a decade.  

The latest move comes after homeowners braced for rising mortgage costs ahead of the ‘knife edge’ decision by the Bank and mortgage lenders began pulling their cheapest deals last week in anticipation of a rise, with a flurry of further rate increases announced yesterday.

City experts had believed the Bank could raise rates from the current record low of 0.1 per cent to 0.25 per cent to keep a lid on spiralling prices  and major lenders had began pulling their cheapest deals in anticipation of a rise last week.

Despite the Bank of England holding interest rates today top banks, which axed their best deals in anticipation of them going up, have still kept their best deals out – amid claims of a ‘rip off’.        

Britain’s biggest building society, Nationwide, withdrew all of its tracker mortgages that follow changes to the Bank of England base rate, and increased the cost of other home loans by up to 0.35 percentage points.

HSBC revealed plans to hike rates on dozens of fixed deals from today. The bank previously offered the cheapest two-year fixed rate on the market at 0.99 per cent for borrowers with a 40 per cent deposit. NatWest and TSB also announced rate hikes on a host of loans by up to 0.15 and 0.3 percentage points respectively. 

Expectations of an imminent rate hike had been stoked after some policymakers on the Bank’s nine-member rate-setting panel voiced concerns about the rise in consumer prices and hope to keep a lid on the peak in inflation.

But today, the Monetary Policy Committee voted seven to two in favour of holding rates at 0.1 per cent. Committee members Michael Saunders and Dave Ramsden had both voted in favour raising interest rates to 0.25 per cent. 

Currency traders had largely priced in an increase to rates, and the pound today fell by nearly 0.8 per cent to 1.355 against the US dollar, taking it to a four-week low. Sterling was also 0.5 per cent down against the euro at 1.173.

It comes after the headline measure of consumer price inflation in Britain dipped slightly in September to 3.1 per cent, but remains more than a percentage point above the Bank’s Government-mandated target of 2 per cent.  

In the past, the rate-setting panel has sometimes held off from raising interest rates if it judged the increase in prices to be tied to temporary phenomena. Some of the current inflation increase is because of temporary factors, including comparing prices to those from a year ago when they had slumped in the early months of the pandemic.

However, there are signs that the rise in inflation is becoming embedded in the UK economy through higher wage increases. The Monetary Policy Committee, which also said the Bank would keep up its £895billion quantitative easing programme, will hold its next meeting next month with its decision published on December 16.  

Financial markets had expected the Bank to raise rates this month amid soaring energy and fuel costs and recent comments from Governor Andrew Bailey that policymakers would have to ‘act’ to bring inflation under control.

The minutes showed the Bank held its nerve on rates as most members wanted confirmation first from upcoming official figures that unemployment has not jumped markedly higher following the end of furlough support.

Policymakers were also concerned over signs the UK economy is flagging as supply chain woes hold back growth, with consumer spending also proving more muted than expected. It now expects the UK economy to return to its pre-Covid level by the first quarter of 2022, against a previous prediction for a recovery by the year end. 

The report also outlined a gloomy eight months for households from rising prices, but it stuck by its outlook that the inflation spike will remain ‘transient’ and will ‘fall back materially from the second half of next year’.

Supply chain problems that have been impacting a raft of sectors since the early summer are set to last until the end of next year – longer than the Bank first expected – but that too is set to fade from the end of 2022.

The decision comes two days after the US Federal Reserve left interest rates unchanged as it announced it would start winding down the stimulus programme it put in place during the pandemic to keep inflation under control. 

Rob Gill, managing director at Altura Mortgage Finance in London, told MailOnline today: ‘Many will be surprised by the Bank of England’s decision to leave the base rate unchanged at 0.1 per cent, including mortgage lenders who’ve raised rates recently in anticipation. This could see lenders pause for breath on further rate rises until the next announcement.’

And Marcus Wright, managing director at Bolton Business Finance, told MailOnline: ‘A rate rise by the Bank would have a devastating effect for both small businesses and the property market, so this was the right decision. 

‘With businesses and investors barely recovered from the pandemic, adding to the cost of borrowing now could derail the recovery. 

‘Small business owners are seeing strong demand for goods and services, with many seeking finance to meet this demand. Increasing the cost of borrowing now is too soon, with uncertainty on the rise as we head into the winter.’ 

The Bank slashed interest rates at the start of the pandemic to encourage spending rather than saving as the economy tanked.

But with inflation now predicted to rise above 4 per cent next year, all eyes were on the Bank at 12pm today as officials attempt to keep the economic recovery on course while combatting soaring prices.

Dominik Lipnicki, director of Your Mortgage Decisions, based in Market Deeping, Cambridgeshire, told MailOnline: ‘It didn’t happen today but most agree that a base rate rise is on the way and over the next few months we could even see rates rise to their pre-pandemic level of 0.75 per cent. 

‘Whilst the Bank of England is under pressure to keep inflation under control, much of the predicted rise and fall in inflation is already baked in and will happen irrespective of their actions today and over the coming months.’  

While a rise in interest rates could have been a shot in the arm for struggling savers, it would have increased costs for borrowers and mortgage holders.

Anyone on a standard variable mortgage would see their bills rise as soon as the Bank hikes its base rate, while those on a fixed-term deal would find the cost of borrowing much higher when they come to renegotiate their deal.

Rob Peters, principal at Simple Fast Mortgage in Altrincham, told MailOnline: ‘With the Bank of England voting to keep interest rates at the current historically low level , this will alleviate some of the current fear in the UK property market. 

‘However, mortgage borrowers may not benefit as many mortgage lenders are likely to continue with increases in mortgage interest rates, as they build in the markets expectation that BoE will still raise interest rates in the near future.’ 

It comes as data from the financial information service Defaqto this week revealed the number of sub 1 per cent mortgages on the market has decreased from 82 to 22 in the last week as speculation on a base rate rise has risen.

Economists at Wall Street bank Goldman Sachs had said a rate hike to 0.25 per cent was likely as officials on Threadneedle Street would want to ‘act pre-emptively and decisively’ in the face of rising prices. 

But they added that a hike to 0.5 per cent would have been possible given ‘the desire to nip inflation in the bud’.

Households would have faced an immediate £1.9 billion increase in interest payments on variable rate mortgages, credit card and other personal lending if rates were to have risen by 0.5 per cent, according to analysts at accountancy firm Mazars.

Paul Rouse, of Mazars, said: ‘It is important UK households are prepared for the impact of interest rate rises on their budgets. After the weekly grocery and energy bills, mortgage and credit card repayments could be the next items to become more expensive.’

On the other hand, Goldman Sachs had also added that the Bank could decide not to hike rates until its December meeting given the slowdown in the economic recovery and the end of the furlough scheme, which could see unemployment rise.

A lift in interest rates could prompt more households and businesses to hold onto their cash, stunting growth, as it becomes more expensive to borrow.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said before the decision was announced: ‘This week’s interest rate decision is on a knife edge, with the markets now almost entirely convinced of a rise, and economists divided.’ 

It comes as Nationwide revealed the average UK house price has topped the quarter-million pound mark for the first time.

It hit £250,311 last month, having grown by almost 10 per cent in the past year, according to a survey by the mortgage lender. 

House prices have soared over the past two years, in part due to a stamp duty holiday during the pandemic that created a surge in demand. 

Momentum continued after the tax break ended in September, with the Nationwide survey showing that prices have risen by £30,728 since the start of the Covid crisis in March last year.

It means the cost of the average UK home has risen almost fivefold in 30 years, climbing from £53,000 in October 1991.

The market has also been spurred by buyers looking for more indoor and outside space, but bigger properties have not been plentiful. 

This has led to intense competition in rural and coastal areas such as Salcombe in Devon and Padstow in Cornwall.

Nationwide’s Robert Gardner said: ‘Mortgage applications remained robust in September, more than 10 per cent above the monthly average recorded in 2019.

‘Combined with a lack of homes on the market, this helps to explain why price growth has remained robust.’

Economists said the continued growth was also down to record high levels of household savings as people stuck at home during the pandemic reduced spending.

But with inflation currently at 3.1 per cent and predicted to rise above 4 per cent next year, there could be more uncertainty ahead. 

The outcome of today’s Bank of England interest rate decision will be one factor affecting house prices in the months ahead.

An increase in the interest rate from the current record low of 0.1 per cent to 0.5 per cent would add £355 to the annual cost of servicing the average floating rate mortgage, Nationwide warned.

The cost of mortgage deals has been rising in anticipation of a possible hike in interest rates. 

Andrew Wishart, property economist at Capital Economics, said: ‘We expect house prices to continue to beat expectations in the near term before a gradual rise in mortgage rates applies the brakes in the second half of 2022.’ 

However Tom Bill, head of UK residential research at property consultancy Knight Frank, said he did not expect interest rates to have a big impact on the housing market until they went higher than they were pre-pandemic.

He said: ‘The housing market has largely shrugged off the end of the stamp duty holiday and price growth continues to apparently defy economic gravity.

‘Interest rates were 0.75 per cent in early 2020 before Covid-19 struck and we wouldn’t expect any meaningful impact on prices or demand while they remain below that level.’