Bank of England holds interest rates
THE Bank of England’s Monetary Policy Committee today agreed to maintain its long freeze on interest rates at 0.5%.
The Quantitative Easing programme was also held at £200bn.
Business leaders in the West Midlands had urged the MPC to maintain its current policy in an attempt to sustain growth. Many said businesses emerging post-recession needed all the support they could get and rising costs would hamper their development.
However, economists are now split on how long the Bank will be able to withstand inflationary pressures. Rising fuel and energy charges, the increase in the rate of VAT and the 0.5% dip in GDP during the last three months of 2010 are all adding pressure on the MPC to consider an increase.
Several members of the committee are thought to want to raise rates but so far they have been resisted.
Tom Vosa, chief economist to Yorkshire Bank, speaking at a lunch event organised by Yorkshire Bank Corporate and Structured Finance and TheBusinessDesk.com, said he expected rates would rise later in the year when the committee had no option but to bow to the inevitable.
Professor David Bailey, of Coventry Business School, has warned that any moves by the MPC to raise rates would hamper UK manufacturing firms and other exporters because it would likely strengthen Sterling and therefore make the cost of British goods abroad more expensive.
Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, said despite the level of inflation it would have been a major surprise had rates increased.
“The recent step up in inflation rates has intensified the pressure on the MPC. However, had they decided to raise rates today it would still have been a major surprise.
“Throughout the past year the MPC has taken a consistent line that inflation is high because of a series of temporary factors, which will gradually fall away. Given that the drivers of the recent surge in inflation – commodity prices and increases in indirect taxes – fall squarely into this category, it is difficult to see how a change in policy could be justified,” he said.
Mark Smith, regional chairman at PwC in the Midlands, said: “With the committee weighing up the conflicting challenges of controlling rising inflation and supporting economic growth, today’s decision was always going to be a close call.
“Midlands businesses will now be turning their attentions to the Bank’s forthcoming Inflation Report, which some commentators believe could prove the catalyst for a tightening of monetary policy in the months to come. However, while consumer confidence and the overall health of the economy remain fragile, an increase in rates is still likely to be some way off.”
Sue Kirby, EEF Midlands Region head of external affairs, said: “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.”
Ian McCafferty, CBI Chief Economic Adviser, said: “With more MPC members showing their concerns about inflationary pressures, the Bank is in the process of shifting its stance.
“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.”
