Low interest rates set to continue

by Trevor Sturgess

The cost of borrowing remains unchanged after the Bank of England held interest rates at the historically low 0.5 per cent for the sixth month in a row.

As widely expected, the Bank’s Monetary Policy Committee decided there was no need to alter the rate it set originally in March.

The background to its decision will be published on September 23.

Experts predict that the Bank is likely to keep interest rates at this level into 2010.

At the same time, the Bank said it would continue with its £175bn asset purchase programme of so-called quantitave easing (QE).

The Bank’s Monetary Policy Committee expects the QE programme to take another two months to complete and said it would keep the scale of the programme under review. The Bank has already pumped nearly £146bn into the scheme.

The decision was made amid signs of a recovery in the UK economy, with output, house sales and prices all apparently on the rise. However, rising unemployment may dampen hopes of an early escape from recession. James Thomas, head of residential development and investment at Jones Lang LaSalle, which manages Kent Science Park, said the housing market continued to show optimism, with gross lending up 60 per cent in the past five months.

UK house prices had increased for the six consecutive month, although overall prices had fallen by 14.4 per cent from their peak.

But he warned that there were danger signs on the horizon. “While the recent improvement in the market is encouraging, it is impossible to ignore the short-term risks posed to the UK residential sector by rising unemployment and poor credit availability. We anticipate the current market revival to be unsustainable and predict a further contraction in prices during 2010 by -7%.”

Paul Guest, head of EMEA Research at Jones Lang LaSalle, added that the commercial property sector had bottomed out.

He said: “The extension of lower borrowing costs in the face of a fragile recovery and no risk of a short-term spike in inflation will help sustain the economic recovery, thereby supporting business sales and ultimately property income growth.”

Edward Menashy, chief economist with Charles Stanley, complained that there were few signs of an increase in bank lending.

“The failure of the banks to lend can be attributed to the lack of solvency amongst the banks themselves, the fear of incurring more bad debts in weak economy, or the desire not to borrow on the part of indebted households and companies.”

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