Relief for borrowers as Bank of England holds rates

British borrowers were handed some respite on Thursday as the Bank of England decided to hold interest rates at 5.75%.

There was widespread speculation that rates would be hiked for the sixth time in little over a year, a situation which would result in debt problems for countless consumers.

Thursday’s decision to leave rates unchanged is seen as a direct fallout from the sub-prime mortgage crisis in the United States. Sub-prime mortgages were given out to people with poor credit ratings or low incomes and thousands have defaulted on these loans already.

The Bank of England also said that recent volatility in global markets prompted it to leave rates unchanged.

The hold on interest rates on Thursday is good news for British borrowers. The recent sharp rise in rates has put many homeowners under financial pressure. Home repossessions are on the up and now stand at their highest level in seven years.

In turn, interest rates are now at their highest level in almost seven years, up 1.25% from a year ago. There was widespread speculation that interest rates would hit 6% by the end of 2007, however this now seems unlikely.

Much will hinge on the lending crisis in the United States, which at the moment is showing no signs of abating. And if the current market jitters continue, no hike in interest rates is likely this year or early next year.

However, any reduction in interest rates is also highly unlikely so this could be a good opportunity for consumers to fix their interest rates if they haven’t already done so, or find a better mortgage deal. The British economy is in a strong position so any easing in the current global worries could prompt a rate rise in coming months.

Meanwhile, the higher cost of borrowing seems to be having a knock-on effect on the housing market. Prices were up just 0.4% in August, while prices were up just 1.6% for the three months to August. This is a sharp drop from the 4.5% rise from January to March. However, Thursday’s decision to hold rates may boost prices in the coming months.

While many potential borrowers are being put off by high interest rates, the availability of credit to the banks themselves has dried up, making it increasingly difficult for consumers to take out loans at the moment.

This has even prompted the Bank of England to offer to inject billions of pounds into the banking system so banks could borrow money.

For the consumer, these are uncertain times. Property prices and high street goods price increases are falling back as house repossessions are on the up. No further change in interest rates is expected next month. However, if global markets stabilise and the US sub-prime crisis shows signs of abating, there is a slight possibility of a final interest rate rise to 6% in November.