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Interest rates held at 0.5%

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Written by: Paloma Kubiak
10/05/2018
Long-suffering savers have been dealt a blow but it’s good news for mortgage borrowers as the Bank of England base rate has been held at 0.5% for May.

The Monetary Policy Committee (MPC) voted by a majority of 7/2 to maintain the base rate at 0.5%.

Just last month, the markets were pricing in a 98% chance of a rate rise but earlier this week, it dropped to just 8% following subdued economic data.

Minutes of the meeting stated: “The preliminary estimate of GDP growth in the first quarter was 0.1%, 0.3 percentage points lower than expected in February. Household consumption growth remains subdued, in line with the modest growth in real income over the forecast period.

“Wage growth and domestic cost pressures are firming gradually, broadly as expected.  The MPC continues to judge that the UK economy has a very limited degree of slack.

“For the majority of members, an increase in Bank Rate was not required at this meeting.  All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.”

Inflation

Inflation currently stands at 2.5%, above the 2% target, but lower than the peak of 3.1% towards the end of 2017.

The rate is forecast to fall to 2.4% in Q2 2018, to 2.1% in Q2 2019 and to the 2% target by Q2 2020.

The MPC noted that the “most import-intensive components of CPI appear to have peaked” and the impact of past depreciation of sterling on CPI inflation, is “likely to fade a little faster than previously thought”.

It noted: “Taking external and domestic influences together, CPI inflation is projected to fall back slightly more quickly than in February, reaching the target in two years. These projections are conditioned on a gently rising path for Bank Rate over the next three years.

“The Committee’s best collective judgement therefore remains that, were the economy to develop broadly in line with the May Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon. However, that judgement relies on the economic data evolving broadly in line with the Committee’s projections.”

The effect of today’s base rate decision

Kevin Roberts, director, Legal & General Mortgage Club, said the decision is welcome news for borrowers and allows them to continue making the most of these near record low rates.

“Although there is a great deal of speculation about future rises it is important not to get carried away. Any rise should be gradual and it will likely remain a good time for borrowers to assess their current mortgage situation.”

For beleaguered savers, this will come as a blow. Charlotte Nelson, finance expert at data site Moneyfacts, said: “Today’s rate decision has dashed savers’ hopes of a better return. Savers are likely getting beyond fed up with the low rates that have plagued them for so long, which is why their hopes had been pinned on another base rate rise boosting their returns. Unfortunately, their patience will now be tested once again, as they will have to keep waiting for base rate to increase.

“Despite this, the savings market is showing some signs of positivity, with rates starting to improve regardless. The fixed rate market has had the largest boost, with competition among newer banks and higher SWAP rates fuelling the rise. As a result, the average two-year fixed rate has climbed to 1.50% today, up from 1.17% in May 2017, while the average five-year fixed rate market has grown by 0.27% to stand at 2.08% today.”

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