Why have rates been held?

By Adrian Coles Director General, The Building Societies Association

Five rate rises have hit UK consumers' exuberance

Interest rates rose for the fifth time in August, but this month, rates have been held. The Director General of the UK's Building Societies Association explains why the Bank of England (BOE) has given borrowers a welcome reprieve.

It is no great shock that the BOE has decided to put a hold on interest rates this month.

It has never been the intention of the bank to precipitate a crisis in the economy, but rather to slow down consumer spending, and the housing market in particular.

The five rate rises since November last year seem to have had the desired effect, certainly in terms of the housing market.

They have added nearly a third to the monthly cost of a variable-rate mortgage and consumers are starting to feel the pinch.

Playing safe

Figures released by the Building Societies Association (BSA) for July indicated that although lending is still looking very strong, with gross advances at £5,125 million (their highest since last October), the approval figures indicate that people are now looking to remortgage.

Approval figures show loans which have been promised, but not yet made, and the BSA's figures suggest that with interest rates rising, people may be starting to fix their mortgages, in response to the strong message coming from the BOE.

The picture is complex, as data released by the British Bankers' Association (BBA) showed that approval numbers were 9.9% weaker than June and 19.5% weaker than July 2003.

The MPC has to tread a fine line...without tipping the economy into recession Adrian Coles

In addition, Nationwide building society released data earlier this month showing that house price inflation was just 0.1% in July, well down on the rise of 2.1% the previous month. The BSA has said it is anticipating a slowdown in the housing market, but not a crash.

The MPC has to tread a fine line, balancing the differing needs of various sectors of the UK's economy, without tipping the economy into recession.

A slow down in consumer confidence and spending has also been indicated by data from the British Retail Consortium (BRC).

It reported that sales last month were just 1.1% higher than August last year, on a like-for-like basis and well down on July's 1.8% growth.

Manufacturing, which saw output rise by 0.9% in the second quarter of this year, is still vulnerable to a downturn in demand in the global economy.

This could be caused by a number of factors including rising oil prices.

Brakes on

A hold on interest rates is the sensible decision and the Bank of England's caution in deciding not to increase rates is to be welcomed.

All the evidence suggests that consumers are starting to get the message and the Bank, as Charlie Bean its chief economist put it "is not in the business of trying the clobber the consumer."

It may be that the cool down means that there will not be another rise this year, and interest rates have peaked at 4.75%.

If there are further rises early next year, they will probably peak in the first quarter at 5 or 5.25%.