While it is welcome news for borrowers this month, many in the City still expect there may be another rate rise in the near future.
UK inflation fell to 2.7% in April, down from an 3% - an 11-year high, but it is still well above the target of 2%.
There have been three rate rises of a quarter percentage point each since last summer: in August, November and January. A number of homeowners with luck or foresight on their side were canny enough to already have fixed rate deals in place on their mortgages, and following these rises the demand for fixed rate deals increased further.
Michael Cooke, senior partner at homeowner loans specialist commented "It is a good thing that a number of homeowners have been prompted to put fixed rate mortgages in place to protect them from the higher cost of increases in the base rate in the future."
An increase this month had been seen as unlikely by many, after the minutes from last month's meeting suggested that the MPC's members were keen to wait and see the effect that the increases so far had had.
"The gist of the minutes to February's meeting was that the MPC really had time to sit and wait, to assess evidence to see whether upward risks to inflation were crystallising," said Investec economist Philip Shaw.
Inflation figures are to be released later than usual this month, on 20th March, so the rate-setters are unlikely to have been given a preview of them.
The committee is also likely to have wanted to know what is in Gordon Brown's budget on 21 March before raising rates again.
The Bank of England recently indicated that interest rates would need to rise further, to keep inflation near its long-term target of 2%.
"I think there is some uncertainty about when the next rate rise will be, but April or May will become the favoured choices," said The UK economist at BNP Paribas, Alan Clarke.
Such speculation is likely to further fuel the already growing consumer appetite for fixed-rate deals on mortgages & remortgages, Michael Cooke of further commented "of course, homeowners often need to raise further funds from time to time, and for those who have already secured a fixed rate, a remortgage often does not make financial sense compared to a secured loan which often serves their needs much better by keeping that great fixed rate mortgage deal in place, yet still utilising available equity to secure a to provide the funds required."
The minutes from this month's Monetary Policy Committee meeting are to be published on the morning of Budget day.
There will be plenty of interest in whether the voting has changed from February's 7-2 result in favour of keeping rates unchanged.
some also felt that the recent falls on global stock markets indicated that a rate rise was less likely.
David Kern, economic adviser to the British Chambers of Commerce noted: "Given the worsening global risks, highlighted by the acute turmoil on the international financial markets, an early hike in rates could have very harmful effects on business confidence and on the economy's growth prospects."
The manufacturers' organisation EEF, also welcomed the decision not to raise rates.
"EEF believes that two of the Bank's stated fears, an escalation of earnings growth and firms pushing through significant price increases, have yet to materialise in any substantive fashion," it commented.
As the credit crisis deepens and more people are feeling the real impact as credit becomes more difficult to obtain, the focus on interest rates has never been greater. 12 months ago, only those connected to the financial services industry were aware of LIBOR and its importance in the marketplace. Today LIBOR is discussed in living rooms and pubs throughout the country with many of these discussions fueled by news reports on television. It is now common knowledge that LIBOR, or London Inter Bank Offered Rate, which indicates the rate that the financial institutions borrow from each other, is the true reflection of how the world markets are reacting to the changing conditions within the sector. The British Banking Association (BBA) works out the BBA LIBOR rate on any given day by taking the inter bank borrowing rates from 16 contributor panel banks and analyses the middle eight rates (dismissing the first 4 and the last 4) to arrive at an average rate. Over the last twelve months the difference between the LIBOR rate and the Bank of England base rate has been substantial and it has also been acknowledged that the period of this variation is also longer than ever before. There has recently been a drop in the rate with a 1.065 percentage reduction on Friday 7th November giving a rate of 4.496% (its lowest point since April 2004), reflecting a slashing of the interest rate by 1.5% to 3% by the Bank of England. The pressure has been put on the financial institutions to pass this on to the general public, not only by the government, but also by the media. With this in mind, many of the leading banks are following the Bank of England's lead. However, in the race to reduce rates, some factors have been ignored in the process; A reduction in interest rates to existing customers is very welcome. However from the bank's perspective this can have a detrimental effect on arrears performance. As borrower's payments are reduced this will automatically increase arrears percentages; for example a borrower who has a monthly payment of ?350 and is say ?300 in arrears, is currently 'off the radar'. However, should the monthly payment be reduced due to a rate cut to ?280 the borrower is now in excess of one month in arrear. This will be replicated throughout the collections process as those accounts that are one month move to two, two to three etc culminating in more accounts reaching the stage where they are referred to solicitors for litigation proceedings to commence. Banks who wish to lend to other banks at the LIBOR rate will be looking at the performance of the borrowing bank's mortgage book. This will inevitably have slipped with the decrease in rates, and will of course only slip further as more cuts happen in the future. As a result, banks will become more unwilling to lend out as the possible risk of lending increases, which will in turn be detrimental to the LIBOR rate. There is another way that banks achieve funding for their daily dealings. Income from their loan books and retail deposits are also used for mortgages and loans. This is how some banks have been able to keep afloat during the recent crisis and it is indeed true to say that the competition that now exists for investments is every bit as intense as it was for mortgages just a few years back. The drop in rates will mean that the income derived from borrowers will plummet, although banks will continue to grapple for investment business. Therefore the bank's profits will droop and their recovery will be made slower. As the banks fight for investment, the rates drop even below the LIBOR rate, meaning that the only way for banks to get liquid funds is through retail business. In that respect, LIBOR must then drop far enough to be attractive to banks in comparison with the cost of getting in retail business. In conclusion it is fair to say that the Governments strategy has had a positive impact on the market and will provide much needed confidence. However it is also fair to stay that there are still many challenges ahead and the antidotal injection of cash and reduction of interest rates will certainly come with some painful side effects. On a side note while I write this, LIBOR has actually gone back up to 5.65% go figure!
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