New Year, but same old when it comes to Interest Rates

At 12.00 noon today, the Bank of England yet again announced that UK Base Interest Rates would be left on hold at 0.5%. In fact this has been the result of each monthly meeting of the Bank of England Monetary Policy Committe since March 2009, the longest period in history when rates have remained unaltered.

At first blush one could think that the Monetary Policy Committee (MPC) have "switched off" by not taking any action on the Base Interest Rate for almost four years. This is, however,  far from the truth, as the Bank have embarked on a programme of Quantitative Easing and other measures to attempt to stimulate the economy over this time, with varying degress of success.

I have long held the view that there would be no increase in UK Base Rates until 2014 at the very earliest, and there is little evidence to suggest that the Base Rate will deviate from this target. In fact, many commentators suggest that the impasse will continue for several years to come.

UK PLC, as measured by Gross Domestic Product (GDP), continues to fluctuate between modest growth and mild contraction, and a very weak Markit UK Services Index print for December paints an ominous picture that the UK is about to contract once again. This must be weighing heavily on the minds of the Monetary Policy Committee (MPC).

Inflation, which is central to Bank policy making, rests just above the Bank's own target and unless we see a rapid spike in inflation (most likely to be caused by a sharp increase in oil or food prices) this will not be a concern for the MPC.

The UK housing market - a key barometer for the financial health of the nation - remains weak, with mortgage approvals continuing at subdued levels and both the Nationwide and Halifax House Price Surveys showing modest falls in sold prices throughout 2012, save for Central London. This is despite Government efforts to bolster lending during the past twelve months, inclduing the Funding for Lending scheme introduced in July and aimed at making funds available for banks to lend on to mortgage borrowers.

Finally, UK unemployment via the Claimant Count method continues to sit at around 1.5m, which has been the case since the depths of the Credit Crisis in 2008. Again, until this number shows signs of improvement, the Bank are unlikely to make conditions more difficult for businesses to borrow to fund expansion by raising rates.

When one adds up these various components, a compelling case can be made for the Bank sitting on its' hands right through 2013. Whilst this will give some breathing room for over-stretched household budgets in terms of variable mortgage repayments, it will be scant comfort for savers, who continue to be pummelled by sub-inflation deposit rate offerings. Indeed, since the introduction of the Funding for Lending Scheme last Summer, many banks and building societies have reduced deposit interest rates even further as the pressure to attract deposits is lower.

Lee Wood