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Experts draw positives from Bank of England base rate decision

09 May 2008 / by Joy Tibbs
The initial response to the Bank of England's decisions to keep the base rate at five per cent was largely negative. However, although there continues to be some disappointment among experts, others have managed to take positives from the decision.

A number of experts have recognised how difficult the decision was for the Bank. "Market commentators had considered the decision to be a difficult one," said Barry Naisbitt, chief economist at Abbey. "There have recently been further signs of slowing output growth and one Monetary Policy Committee (MPC) member voted for a larger reduction in rates than the 0.25 per cent cut last month.

"Against this, inflation is currently at 2.5 per cent and is expected to rise further in the coming months while measures of inflationary expectations have been rising."

Marc Cogliatti, currency strategist at HiFX appears to agree, and is expecting to see further cuts in the foreseeable future. "In light of huge increases in pipeline inflation and reports of rising prices in many sectors, the MPC have chosen to maintain a gradual approach to monetary easing, avoiding back-to-back cuts for fear of de-anchoring inflation expectations. Nevertheless, with risks to economy still focused on the downside, the market is still pricing in further cuts in the months ahead," he says.

And mortgages director at Legal and General, Ben Thompson, is also forecasting further rate cuts, but is not expecting to see a full economic recovery this year, particularly in the mortgage sector. He comments: "It's just a matter of time before the next quarter point cut and the summer of discontent for borrowers continues. Lenders are still being very cautious and favouring direct lending, whilst brokers continue to tear their hair out.

"The market pendulum had swung too far one way with cheap and easy credit and then the crunch came along and made it swing too far the other way. The last time the base rate was 5 per cent, a typical two-year fixed rate was 25 basis points lower. Now it is more like a 100 basis points higher. We look forward to a happy equilibrium but that is unlikely to be this year."

And founder of, Sean Gardner, makes a valid point about the impact of the base rate on mortgage rates. "In recent months it's actually the rate of LIBOR that banks have been most concerned about, so movements in the base rate aren't as important as they used to be," he explains.

However, there continues to be a fair amount of dissatisfaction, as Senior Editor of, Robin Amlôt, expresses.

"Recent economic figures confirm the UK economy is slowing down. All housing market commentators now expect house prices to fall - they just disagree about how far. How many consumers have felt the benefit of lower interest rates?

"The Bank of England is worried about inflation but not even the Monetary Policy Committee can micromanage what's expected to happen to the inflation rate over the next few months by delaying a much-needed base rate cut now."

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