Chancellor of the exchequer George Osborne has pledged to keep interest rates low through cutting public borrowing, in a speech to the Confederation of British Industry today (May 24th).
The Conservatives have for some time been arguing that early cuts were needed after the election to prevent Britain losing its AAA credit rating, something that could force up interest rates in order to make bonds more attractive and help the government go on funding its debts.
With more than £6 billion pledged to be trimmed by the party - a promise that remained in place through the formation of the coalition with the Liberal Democrats - the plan has been to ensure confidence among the markets and therefore prevent such a situation occurring.
Announcing details of the cuts, Mr Osborne reiterated this position as he said: "We need to take urgent action to keep our interest rates lower for longer."
In total, £6.2 billion is being saved, although £500 million will be re-invested into education, apprenticeships and social housing.
Of course, for those interested not in social housing but rather buying their own property the issues may be stark. While some in public sector jobs may have concerns about their employment, for those who can be sure enough about staying in a job but are having to save hard for a mortgage deposit, the issue of interest rates will remain a key one.
However, while this may be an important matter for the government as it wrestles with tough spending decisions, the inflation rate could also influence the direction of monetary policy.
Last week, Bank of England governor Mervyn King had to write an open letter to the new chancellor outlining what the monetary policy committee (MPC) is doing about inflation, after the Consumer Prices Index rate jumped to 3.7 per cent in April. Mr King said this was likely to be temporary, not least because of the spare capacity in the economy, making the current policy over interest rates and quantitative easing right.
However, he added: "The MPC is very conscious that there are risks to inflation in both directions" and stated that the body "stands ready" to act to loosen or tighten monetary policy in the event of such risks coming to fruition. So while those looking for a mortgage may be largely confident about interest rates staying low in the months to come, they cannot be certain.
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