No respite for mortgage market as rate cut looks unlikely

04 June 2008 / by Rachael Stiles
Tracker rate mortgage holders, those looking for remortgage deals and first time buyers are likely to be disappointed tomorrow if analysts' predictions that the base rate will remain unchanged for June are true.

Governor of the Bank of England, Mervyn King, has said that "The near-term outlook for inflation has deteriorated markedly over the past three months." which could drive the MPC (Monetary Policy Committee) to keep the base rate at five per cent.

Hopes of a cut in interest rates have been dashed as inflationary pressures increase, despite the continuing slowdown in economic growth and declining house prices.

CPI inflation was three per cent in April, and, at an Inflation Press Conference last month, Mr King predicted that the rising cost of energy and import prices will "almost certainly push inflation up further, possibly significantly, in coming months." Experts have said it could rise to four per cent during the summer.

"As those price increases feed through to household bills, they will lead to a squeeze on real take-home pay which will slow consumer spending and output growth, perhaps sharply." he continued, making the balancing act faced by the MPC between growth and inflation an ever more challenging one.

After several consecutive cuts in the base rate since last year, the MPC voted almost unanimously to keep the base rate at five per cent in May, and analysts are now wondering if there will be another rate cut before the end of the year, and even considering the possibility that the Bank of England will increase the base rate.

The governor said that while market conditions have stabilised somewhat since the introduction of the Bank of England's Special Liquidity Scheme which injected £50billion into the market to encourage banks to start lending to each other again, they still remain fragile, as the banks continue to adjust their balance sheets by raising new capital and lowering the level of credit available to the rest of the economy.

Falling house prices are part of the "rebalancing of the UK economy", said Mr King, as it moves away from spending and towards saving.

Mortgage rates and higher food, fuel and gas and electricity costs are adding pressure to household budgets which would welcome a rate cut, but with inflationary pressures as they are, this remains increasingly unlikely.

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