Bank continues to hold rates at 0.5%

THE Bank of England opted to hold the base interest rate at 0.5% again today.

Concerns over rising inflation, spurred by the New Year VAT hike, failed to prompt the Bank’s Monetary Policy Committee (MPC) to increase rates for the first time in nearly two years.

In November inflation hit 3.3% as measured by the consumer price index (CPI) – higher than the Bank’s 2% target.

The cost of borrowing has been set at the historic low of 0.5% since March 2009. Economists expect it to remain low fearing any rise could hamper the fragile economy and contribute to a “double-dip recession”.

A rise may help to control inflation but it will also reduce the spending power of those with tracker mortgages and other debts.

David Ost, regional director of manufacturers’ group EEF said with no major wage inflation, holding rates was the right thing to do.

“The debate around the impact of forthcoming austerity measures and above target inflation will have changed little for the MPC over the past month. For now, however, the balance of risks still supports keeping interest rates and asset purchases on hold. But, if we begin to see price pressures starting to flow through to major wage increases the case for raising rates will become stronger.”

David Ost, North West region director of manufacturing body the EEF, said: “The debate around the impact of forthcoming austerity measures and above target inflation will have changed little for the MPC over the past month.

“For now, however, the balance of risks still supports keeping interest rates and asset purchases on hold. But, if we begin to see price pressures starting to flow through to major wage increases the case for raising rates will become stronger.”

Ian McCafferty, the CBI’s chief economic adviser, said: “The Bank is grappling with the need to balance the two conflicting issues of inflation and growth. While this hold announcement is not a surprise, decisions in the coming months will be more difficult as the Bank’s anti-inflation credibility comes under greater pressure.

“Global commodity prices are rising, pushing inflation upwards, and after two years of pay restraint earnings growth is also likely to edge higher over the months ahead. If current economic trends continue, we expect the MPC to respond both in the tone of its commentary and by nudging interest rates higher before mid-year.”