Bank of England Base Rate kept at 5% again

[Kryten]

So I see for another month the base rate has been kept at 5%

http://news.bbc.co.uk/1/hi/business/7597841.stm

But with the economy in the tank should they be lowering this rate, or because of high inflation should they increase the rate? Last month they were split on the decision but most voted to keep it at 5%, and I presume the same will be for this months decision.

Personally from a selfish point of view I would like a drop or two because of my tracker mortgage, but as a lot of the inflation has been because of oil driven rises and food prices etc then not sure that rising rates would have any effect on those and may actually drive them up more as companies have to pay more for their loans.

Surely reducing the rates should allow people to pay less on their borrowing they have (we know that new borrowing is still difficult so should keep things sensible hopefully) and so help prevent some companies having to give out large pay rises to compensate for an increased cost of living?

I am sure I am missing something here (I'm no economics guru that is for sure!), but it seems keeping 5% is quite high given the state of the housing and credit market?

[NicolaUK]

Have you seen the £ against the $ in the past couple of weeks? It's in freefall and a weaker £ means that our imports will get more expensive, further fuelling inflation.

The BoE are stuck between a rock and a hard place and it doesn't looks as if things are going to ger any easier for them anytime soon.

[Roberto]

I think it's the wisest thing to do. Not trying for a quick fix and ******* it up even more. They're learning lessons from the past.

[njc]

They've only one remit - CPI at 2% +- 1%. The state of the wider economy is not a direct concern, only indirectly if it will impact that CPI rate.

[Kryten]

I guess the pound vs dollar is a tough one, but that comes from oil getting cheaper so not much they can do there either?

I do not mind personally if it stays at 5%, its just I do not see rising the rates as a solution right now as its not consumer spending that is causing inflation that I see?

[njc]

The £:$ change is due to the change in outlook between the UK and USA economies. The USA is looking incredibly healthy for something that was recently pronounced as dead.

We shouldn't fret about a sinking exchange rate; it may make our trips abroad a little more expensive but we'll gain enormously from increased exports which will help our economy recover. That's the beauty of floating exchange rates.

[NicolaUK]

we'll gain enormously from increased exports which will help our economy recover.

But we have a service economy, we don't really have much manufacturing here anymore so what is being exported? Very little in comparision from what we import from China and that is paid for in expensive Dollars.

[njc]

But we have a service economy, we don't really have much manufacturing here anymore so what is being exported? Very little in comparision from what we import from China and that is paid for in expensive Dollars.
We export services too; exports are not just products you can hold in your hands.

China makes our imports cheaper but adds very little value to a product. IIRC, our imports in £ from China are surprisingly little. We are exporting high value goods but importing low value goods - which is the right way around.

[NicolaUK]

We export services too; exports are not just products you can hold in your hands.

China makes our imports cheaper but adds very little value to a product. IIRC, our imports in £ from China are surprisingly little. We are exporting high value goods but importing low value goods - which is the right way around.

But what about oil, which is bought in $? I assume that the reason why we're not seeing much cheaper petrol at the pumps than when oil was $147 a barrell is that the exchange rate has fallen (And the fact that the oil companies are greedy too)

[nigel_williams]

I'm in the fortunate position of having cleared my mortgage, so the recent high interest rates have been good to me. Same situation with the Dollar/Pound, it's become favourable for me to exchange some money at last, been waiting 2 years for things to improve. Still not sure when to strike, the trend does seem to be downward but I have no idea where it will stop.

What still puzzles me is that oil has dropped by a significant amount in the last few weeks, but this Gas/Electricity has shot up. The suppliers claim this is because the wholesale price has risen and it's linked to oil prices.

[njc]

But what about oil, which is bought in $? I assume that the reason why we're not seeing much cheaper petrol at the pumps than when oil was $147 a barrell is that the exchange rate has fallen (And the fact that the oil companies are greedy too)

If the price of oil is dropping in $ but not in £ because of the exchange rate, then it's not inflationary or deflationary, in which case it doesn't matter for the BoE as long as the impact of the previous rise in oil has already worked through the system.

[sjg1]

I am sure I am missing something here (I'm no economics guru that is for sure!), but it seems keeping 5% is quite high given the state of the housing and credit market?

Not really. The only other similar market that I'm familiar with is NZ, and their base rate is around 8% (iirc Australia is similar), so most mortgages are at 9-10%. Theirs was at 5% in 2003 and has crept up since, dropping down slightly again this summer.

House prices were overinflated, as with the UK, but cranking up the interest rates seems to have kept things fairly sane. Only in Auckland are they seeing price drops similar to ours, but lots there was stupidly overvalued anyway.

Difference being they have plenty in reserve to cut rates and keep things ticking along nicely. If the BOE had done similar it might have cooled things off rather than allowing the bubble to get bigger and bigger.

[Grandmaster]

When I bought my house in 1994 I was very happy with my 7.5% fixed rate! The problem is that over-inflation of house prices means that prudent increases in the interest rate (which should have been done years ago) would cause meltdown in the housing market and colossal rates of repossessions.

[adam_tomlinson]

I think that rates should be held for as long as possible. Any drop could just make the recession worse if inflation creeps up. We are unfortunately due some pain...