Bank of England base rate likely to remain flat, says Mervyn King

27 June 2008 / by Joy Tibbs
There was mixed opinion among Monetary Policy Committee (MPC) members when it came to the Bank of England base rate decision at the beginning of June, it was revealed yesterday.

The final vote resolved to keep the rate at five per cent for the third consecutive month. However, it emerged at a parliamentary hearing yesterday that the majority of members actually considered raising rates because of rising inflation.

The revelation appeared to contradict the meeting minutes, released on June 18, which said that only 'some' MPC representatives had considered voting for a rise. Only one member, David Blanchflower, voted in favour of a rate cut, with the other eight – including Bank of England governor, Mervyn King, voting to hold it.

The Bank of England has cut rates three times since December, by 0.25 per cent each time. However, with inflation now way above the two per cent Government target at 3.3 per cent, speculators have been anticipating a rate rise in early July.

Mr King said yesterday that the economy was entering a new stage, which he described as "the great unwinding". He predicted that a number of UK banks would start cutting ties with risky assets they had acquired over the last several years.

He added that banks continue to store up credit in order to shore up capital reserves rather than making it available to potential new mortgage customers. As a result, mortgage availability has witnessed a rapid decline and mortgage rates have risen substantially. Moneyfacts.co.uk claimed last week that fixed-rate mortgage rates have hit a ten-year high.

However, the governor attempted to reassure the public that inflation would not necessarily lead to a rate increase. He claimed the MPC believes inflation will drop back toward the target in 2009 and that the committee was looking to avoid a "deep and prolonged recession".

The next interest rate decision is expected on July 10.

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