Pause for thought

The Bank of England’s Monetary Policy Committee (MPC) voted to keep rates on hold at 5% at its July meeting. The decision was widely expected as, despite ongoing pressures in the financial sector and a continued slowdown of the UK housing market, inflation is becoming a serious issue. Interest rates had been cut by a total of 0.75% even though inflation was ahead of the MPC’s government-imposed target of 2%. Now, however, it has hit 3.8% and the MPC appears to have switched its emphasis from supporting economic growth to damping down the effect of these price rises.

The rate cuts so far should have been welcomed by borrowers suffering the effects of tightening conditions. However, the prolonged uncertainty in credit markets has continued to affect lenders' ability to pass on all the benefit of these cuts to borrowers. The Chancellor, Alistair Darling has got personally involved with a recent bond swap proposal from the Bank of England - which does appear, albeit tentatively, to have had a small effect.

Hopes for a further cut in the short term are unlikely to be fulfilled, however. Mervyn King, head of the MPC, has now suggested inflation will continue to run above target for a few months, due mainly to soaring energy and food prices. In Mervyn's words, the appropriately named 'nice' decade (non-inflationary, constant expansion) is over and we are now going to need patience - and good budgeting skills - as the economy rebalances itself.

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