Rate rises at home and in Eurozone
June 14, 2007
The Bank of England has announced its decision to hold interest rates at 5.5% in June. This will give borrowers and homeowners alike some breathing space after recent rises. The quarter point rise in May seemed to have an impact on people’s pockets more than any of the other rises in the last year.
Nevertheless, experts have suggested that even if there was no rise in June, then it is still highly likely that further rises would follow later in the year, with a rate of 6% possible by the end of the year.
The impact of the four base rate rises since last August have finally had the effect of slowing down house prices in May. The UK’s biggest mortgage lender, the Halifax, has reported that house prices went up by 0.3% or a mere £500 in May. Figures from the Land Registry show that prices actually fell in several regions in England and Wales. London and Northern Ireland had the fastest growing house prices.
The last rate rise on 10 May was swiftly followed by mortgage changes, and most standard variable rates went up the quarter percent, like the Bank of England rate. Banks and Building Societies have not been so speedy to increase the rates for savers – or pass on the full quarter percent. Most did not raise rates until 1 June, and most did not think they should pass on 0.25% to their customers. For example, savers in 60-Day Gold with the Halifax who have less than £100,000 in the account, and some of its Bonus Gold savers, have seen just a 0.05% increase before tax. Savers in these accounts have to give the bank up to 90 days’ notice if they want to take their money out with suffering an interest penalty.
Fears that inflation was on an upward path were slightly calmed when the figure for April was announced as 2.8%; this was down from March’s figure of 3.1%. However, the April figure was still well above the government’s stated target of 2%. Prices have been seen to be slowing in the services sector and the British Retail Consortium showed like-for-like sales in May fell as shoppers were affected by previous rate rises and damp weather.
It is widely forecast for the Bank to put rates up again in July, by a further quarter percent to 5.75%, to ensure that inflation keeps on the path downwards to reach the 2% target within two years.
Some experts say that rates will reach 6% in the autumn, but not all are convinced. They believe that the four rate rises are having their desired impact and both retail sales growth and the house market are beginning to soften. The result is that companies are less able to push up their prices and that will help to put the brakes on inflation. Thus a further rate rise is not inevitable. But it remains likely.
Meanwhile the European Central Bank (ECB) raised interest rates from 3.75% to 4%, taking them to their highest level for six years, and they have doubled in a year and a half. The rise did not come as a surprise after a series of warnings about inflation from ECB members in the past few weeks. The ECB sets interest rates for those countries who participate in the European currency – the euro – commonly known as the eurozone.
Economies in the eurozone, and most particularly Germany’s, have been experiencing strong growth in 2007. Unemployment is at its lowest level in the eurozone since the euro was launched, and confidence is high with business activities expanding.
The rate rise is as a result of the ECB revising its inflation forecast in the eurozone up from 1.8% to 2% in 2007, though the forecast is as it was at 2% for next year.
The ECB said its monetary policy was “still on the accommodative side” which probably meant that they would accept the growth in the eurozone for the time being, but that rates might have to rise again if it continues. The ECB government was said to be monitoring all developments closely. Previous statements have been stronger and have been the forerunner to a rate rise.
With close monitoring, the accommodative comment, and liquidity being ample, most experts suggest further rises should be expected further down the line.
The base rate of 4% is the minimum bid rate for its regular refinancing operations. There are two other key rates. The deposit rate went up quarter of a percent to 3%, and the marginal lending rate went up similarly, this to 5%.
The ECB has a tendency to be more predictable than the Bank of England. The feeling is that if the ECB feels the need to raise its rates again, then so will the Bank of England. The Monetary Policy Committee at the Bank will be watching the way the ECB moves in the coming months.
Written by Peter Kenny · Filed Under Banking Savings
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