Bank holds fire on rates again
THE Bank of England continued to resist pressure to increase interest rates from 0.5% today, despite growing concerns over inflation.
The Monetary Policy committee which sets interest rates instead opted to hold the cost of borrowing at its record low level for a 23rd month, fearing that a increase now may jeopardise a fragile economic recovery.
Many economists are expecting rates to rise soon, with May being seen as the likely month for movement.
The Bank is aware that it needs to try and tackle inflation, which, at 3.7%, is almost twice its 2% target.
The dilemma is though, with so little wage inflation, in the ‘real economy’, an increase in the cost of borrowing will do nothing to rein-in soaring global food, oil and metal prices, and serve only to further dent consumer confidence.
Last month, a second member of the Monetary Policy Committee, Martin Weale, voted for a 0.25% increase. He joined Andrew Sentance, in seeking a 0.25% rise.
Despite scaling back its economic forecasts this week, the business group CBI
expects rates will start to rise soon, and by the end of the year will have risen 0.75% to 1.25%.
Commenting on the decision, David Ost, NW director of the industrial group EEF said: “While there remains considerable risks to inflation, the recovery has hit some turbulence in recent months.
“The MPC is right to hold off on rate rises for now as an increase will do little to alter the path of inflation in the short term, which is being driven higher by commodity prices and tax.
“The contraction across the economy in the final months of 2010 may well have been a blip, but as the bigger risk now appears to be growth, the MPC should continue to hold steady until the picture becomes clearer and the economy is firmly back on an upward track.”
The CBI said the move was not a surprise, but believes the MPC is “shifiting its stance” on interest rates.
Chief economic adviser Ian McCafferty, said: ““Looking beyond the recent surprising GDP data, the CBI still predicts growth in 2011, albeit modest, but recent indicators suggest that the inflation outlook has worsened.
“We expect the Bank to start preparing the ground for a gradual normalisation of monetary policy around the second quarter of the year.”
Brian Sloan, head of business and economic policy at Greater Manchester Chamber of Commerce, said: “Businesses and consumers will be relieved that yet again the Bank of England has held rates at the record low of 0.5%, however it is likely to have been the surprise news of the 0.5% contraction of the economy during the final quarter of 2010 that has stopped more members of the committee joining Andrew Sentance and Martin Weale’s call for an interest rate rise.”
