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UK interest rates held despite US reduction

  • 01/02/2001
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By Ben Marquand The Bank of England has taken the decision to keep interest rates on hold for the el...

By Ben Marquand

The Bank of England has taken the decision to keep interest rates on hold for the eleventh month in a row, despite the surprise cut in American rates. But while interest rates in the UK have not moved, a number of lenders have cut their rates.

The American Federal Reserve caused a stir in January when it took the unusual decision to cut US interest rates by half a percent to 5.5% in between the meetings of its rate setting committee. This sparked debate in the UK as to whether the Bank of England would follow the US lead, but in its monthly meeting in January, the Monetary Policy Committee (MPC) decided against changing the rate from 6%.

Mike Boles, director at Savills Private Finance, said: “There was always a chance that there would be a knee-jerk reaction and we would also cut our rates, but although the Bank of England has stated that there is no immediate need to cut rates, I do think that they will fall next month.”

The decision to cut interest rates in the US has been seen as a step to stave off the danger of a recession. The American economy has slowed down noticeably in the last two months as spending and investment has declined, and most recently when retailers reported very poor trade over Christmas. But despite Sir Eddie George, the governor of the Bank of England, saying in December that “if the US sneezes, we all catch a cold,” the UK economy is still seen by many to be in a strong position, and if the UK interest rate is cut it is likely to be because of changes in the UK economy.

Boles said: “People have been saying for some time that UK interest rates have peaked, and while the economy may be slowing down, we are nowhere near a recession. Interest rates will come down slowly, and it will probably take a whole year to get half a point lower if there are no external shock factors.”

However, there are other external pressures on the UK interest rate such as the rate of inflation, which remains below the Government’s target of 2.5%. Ray Boulger, technical director at John Charcol, said: “Inflation has been steady at around 2% for months now but all the indicators suggest it will go down. This probably means that interest rates will fall a quarter percent in February, then probably another quarter percent in the next few months.”

The speculation has already had an impact on the mortgage market. Bristol & West, Bank of Ireland Mortgages and New World Mortgages have all reduced rates downward. Boulger said: “The rate on a lot of fixed rate mortgages has come down and there are five year-fixed rate products available for as little as 5.49%. When we do get cuts tracker mortgages will come down, and the only question for standard variable rates will be whether to cut rates by a quarter percent or to drop by half a percent straight away.”

However, Martin Ellis, group economist at the Halifax, said that while interest rates cuts would help to underpin the housing and mortgage markets, they may not happen straight away. He said: “The MPC are still looking for convincing signs that retail sales and borrowing are slowing down, and until this happens I do not think that they will be in any hurry to change the interest rate.”


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