Interest rates kept on hold as house price crash continues

Against a background of economic conditions that the Chancellor described as "arguably the worst in 60 years", and a forecast by the OECD of recession in the UK later this year, the Bank of England's Monetary Policy Committee kept rates on hold yesterday for the fifth successive month, at 5 per cent.

It was universally expected, but even those resigned to the decision were calling for action in the coming months, in the face of collapsing consumer spending and plummeting house prices.

Shortly before the MPC announced its decision, the Halifax reported a 12.7 per cent fall in real estate values compared with the same month last year – possibly the most severe in modern times. It is the worst since the Halifax's index began in the early 1980s and according to Michael Saunders, economist at Citi European Economics, "the greatest decline since the start of the 1930s, at least".

Mr Saunders points out that in the housing crash of the early 1990s, the peak-to-trough decline in prices was 13.1 per cent, over a period of 74 months (May 1989 to July 1995). "Now, house prices are down 12.7 per cent already, in just 12 months – the message of economic weakness is clear."

Calls for the Bank to cut rates seem set to intensify. David Kern, economic adviser to the British Chambers of Commerce, commented: "A major recession can still be prevented if prompt action is taken. The MPC should start cutting interest rates promptly in the next few months, as soon as UK inflation peaks."

However, Richard Lambert, Director General of the CBI, warned that "the hard-won credibility of our system could be jeopardised if the Bank moved too quickly at a time when inflation is still moving sharply higher".

The MPC has evidently failed to follow the passionate advice of one of its members, David Blanchflower, who spoke out last week about the dangers to the economy of "complacency" and the need for a "substantial fall" in rates.

The Bank's deputy governor, Charles Bean, said at the US Federal Reserve's Jackson Hole conference recently: "It's fair to say that if you look at the shocks... this is at least as challenging a time as back in the 1970s." The minutes of the meeting will be published on 17 September.

The consensus view in the City is that rates will come down in November, after inflation has peaked and shortly before the next quarterly Inflation Report from the Bank. Most commentators also see an aggressive programme of rate cuts in 2009, with the official cost of borrowing money settling around the 3.5 per cent mark.

In a parallel move, the European Central Bank also kept rates on hold yesterday, at 4.25 per cent. Some detected a more "hawkish" stance in officials' statements. Jean-Claude Trichet, the ECB President, said that eurozone growth would progressively recover after the current trough, based on falling oil prices, boosting real incomes and a still resilient world economy.