Interest Rate Update to 1 September 2010

UK Interest Rate: 0.5%

UK Interest Rates Forecast: Rates must rise, but probably not yet

BoE Deputy Warns Rate Rises Cause "Collateral Damage"

Bank of England Deputy Governor Charles Bean has warned that interest rates alone are not a sufficiently powerful tool to prevent future financial crises. Bean said that interest rate rises caused significant "collateral damage" and that it was more important to exercise some control over banks' lending habits.

Bean said that in the recent financial crisis, although the Bank of England was criticised for raising interest rates too late in the day, in reality they could not have prevented the crisis anyway. Banks' reckless behaviour caused the crisis – more direct control over the banks would have been a more successful way of preventing it.

The Deputy Governor's remarks were made in the context of discussing the Bank of England's new macro-prudential committee, which is being transferred from the Financial Services Authority as part of a move to give the Bank of England greater regulatory powers over banks.

Weak Mortgage Lending Not Solved By Low Rates

Mortgage lending remains weak, according to the latest figures from the Bank of England and the Building Societies Association (BSA).

The BSA reported negative net lending for the second consecutive month. Although overall lending rose from £1.8bn in June to £2.0bn in July, once repayments and redemptions were taken into account, net lending was -£379m in July – in other words, people repaid more than they borrowed.

The Bank of England figures show a similar trend – although a slight rise in mortgage approvals was recorded, net lending (after repayments and redemptions are stripped out) fell from £518m in June to just £86m in July.

Low interest rates provide little incentive for people to save – the only remaining choices are to spend the money or make additional repayments on mortgage debt. Clearly many UK homeowners are wisely choosing the latter option, in the knowledge that mortgage rates will eventually rise again.