Cruel to be kind

Savers will breathe a sigh of relief that the Bank of England has decided not to slash interest rates. Even the best savings accounts are now paying around 4%, while many are rewarding their customers with less than 1% interest. This is a paltry figure for anyone who is trying to save enough money for a deposit for a house, or who is retired and trying to live on a savings income.

Ironically, it's also good news for prospective mortgage borrowers, particularly first-time buyers who are struggling to get on the housing ladder. One of the main concerns of the Bank of England's monetary policy committee was that a cut in rates would further fuel the house price boom - and increase the risk of a bust. Prices are currently rising at around 20% a year, a level many regard as unsustainable.

Any reduction in the bank base rate would have resulted in cheaper mortgages. That in turn looked likely to push up house prices as buyers took on even greater levels of debt. The MPC is concerned not to recreate the scenario at the end of the 1980s when homebuyers took on so much debt that when interest rates eventually rose, people couldn't keep up with mortgage payments and many had their properties repossessed.

The MPC would prefer to see house prices stabilise or drift down gently, rather than collapsing suddenly and triggering a mass panic.

Many people measure their wealth by the value of their home. When consumers feel confident they will carry on shopping, investing in the stockmarket and buying products from our manufacturing industries. If they start to see house prices plummet they begin to feel nervous - and poorer.

There are also signs that, since borrowing is currently so cheap, thousands of people have taken on worrying levels of personal loans and credit card debt. A recent survey suggested that the average Briton was nearly ?11,000 in the red. Many of our largest companies such as JP Morgan Chase and Royal & Sun Alliance are drastically cutting jobs. Economists are concerned that too many redundancies and too much debt will lead to consumers suddenly clamping shut their wallets, which would be a blow to the health of the UK economy.

The decision by the US Federal Reserve earlier this week to slash rates by 0.5% - more deeply than had been expected - had led commentators here to suggest that there was a 50-50 chance of a cut by the MPC in the UK. Manufacturers and unions had pressed the MPC to reduce rates, arguing that industry needed help to survive. But while the Fed may have cut rates in the hope it would encourage investors to switch their money out of cash and into the stock market, people here are more likely at the moment to switch out of cash into property. The UK economy looks to be in a more robust state than the US or our neighbours in Europe. Our economic growth is steady, rather than rapid, and there are no signs at present that we are about to slip over into a deflationary environment. The MPC is hoping that taking a tough stance now will mean a more stable economic outlook in the future.