Belfast Telegraph

Relief for homeowners as interest rates stay at low

By Jamie Grierson

The Bank of England will provide some respite for beleaguered household budgets on today by holding interest rates at a record low.

In the week when Scottish Power announced an average hike of nearly £200 in annual power bills, members of the Monetary Policy Committee (MPC) are expected to keep the Bank's base rate at 0.5% for the 27th month in a row.

Economists have put back the likely date for the next rise in rates to November as worries over growth prospects override concerns about inflation, which hit 4.5% in April, the highest level in two-and-a-half years.

Business leaders have welcomed the bank's stance and warned a rate hike would throw the economic recovery off course.

David Kern, chief economist at the British Chambers of Commerce (BCC), said: "While increased utility prices and high inflation puts the MPC in an uncomfortable situation, countering this with a rise in interest rates would be a mistake.

"As long as wage increases remain subdued, the MPC should hold its nerve for the time being."

Borrowers are seeing the benefits of expectations that it will be some months before rates rise, with the average cost of a two-year fixed rate mortgage falling to 4.41%, its lowest level since the beginning of the year, following a drop in swap rates, upon which the deals are partially based.

But the delay is bad news for savers, who will continue to suffer from low returns on their money at a time when high inflation is eroding the value of their deposits.

The squeeze on household budgets is set to get tighter as families face another round of utility bill rises, as revealed by Scottish Power on Tuesday.

It said tariffs for gas will rise by 19% by August 1, with electricity due to go up by 10% from the same date. The move impacts 2.4 million households.

The average increase is greater than the 15% forecast by the Bank of England in May and will add to the inflation dilemma faced by rate-setters.

The Bank has warned inflation will rise above 5% later this year and remain above the Government's 2% target throughout 2012, before falling back in 2013.

Despite this, IHS Global Insight chief UK economist Howard Archer expects the MPC to hold off lifting rates until November at the earliest.

He said: "There is little doubt the MPC will keep interest rates at 0.5%, given the current softness of the economy, serious concerns over the consumer, and the fact that fiscal tightening increasingly kicked in from April."

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