Business & Finance mortgage

Bank of England holds rates again

The Bank of England has held interest rates at 0.5 per cent and decided not to raise the amount of quantitative easing (QE) from the current level of £375 billion. The decision was as expected by analysts who believe that the amount of QE will be increased by £50 billion in November.

The Base rate has now been at the record low of 0.5 per cent for over three and a half years. Keep reading to find out what effect this is having on large mortgage rates and high value mortgage lending.

Base rate held at record low

At October's meeting, the Bank's Monetary Policy Committee (MPC) kept the Base rate at 0.5 per cent, where it has been since March 2009. The MPC also decided not to introduce any further stimulus measures or increase its QE programme.

Under QE the Bank of England creates money and uses it to buy mainly government bonds to stimulate the economy. The Bank expects to have finished spending the latest tranche of £50 billion of QE, which was approved in July, by 1 November.

Andrew McPhillips, chief economist at Yorkshire Building Society, said: "The Bank is now into the final month of the latest round of asset purchases and it arguably makes sense to complete this before announcing a further round of QE.

"However, the MPC will be disappointed by recent data releases, notably the I Purchasing Managers Index indicators, and this does increase the probability of a further round of asset purchases before the end of the year."

Could the Base rate fall by the end of 2012?

Some experts have called for a further cut to the Base rate. Capital Economics has long been predicting that the MPC will cut the Base rate in November, although the success of the government's Funding for Lending scheme (FLS) could determine whether such a cut is required.

Martin Beck, UK economist at Capital Economics, said: "The Bank of England's latest Credit Conditions Survey certainly suggests that lenders expect the scheme to boost the availability of credit to households. And there is some tentative evidence that the FLS has helped to reduce rates in the wider wholesale market."

Mr McPhillips agreed that a Base rate cut could be held back if the prospects for the Funding for Lending scheme providing low cost mortgages and finance looked good.  He added: "The maintained base rate of 0.5 per cent is as expected, given that it was not even discussed at the September meeting.

"In my view, there remains little to no benefit from a cut to the Base Rate and comments from MPC members outside of the official minutes suggest that they still hold this view."

Islay Robinson, director of Enness Private Clients, said: "It will be interesting to see whether the Funding for Lending scheme does reduce the cost of borrowing – not only for large mortgages at low loan to values but to borrowers across the spectrum."
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