Breaking News: Interest rates held for 22nd month in row
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 Scott, senior stockbroker at Redmayne-Bentley, said: “As universally expected UK base rates were kept at a record low of 0.5% for the 22nd consecutive month in the announcement just released by the Bank of England’s Monetary Policy Committee.
“Whilst David Cameron, on Sunday, raised concerns about growing inflation, and this will have been actively discussed at the meeting, he also expressed his full support for the Bank of England Governor, Mervyn King.
“Having finished last year with a consensus forecast that UK interest rates would end this year at around 0.75%, since then this consensus has moved up appreciably and the view now is that rates are likely to end this year at double their current level or 1%.
“The conclusion from this is that the good ship QE2 will not be setting sail from the UK again anytime soon, as inflationary concerns become the main issue for policy rate setters.”
Ian McCafferty, CBI 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.”
Roger Bootle, economic adviser to business advisory firm Deloitte, said: “Pressure is mounting on the MPC to raise interest rates in order to preserve its credibility in the face of above-target and rising inflation. However, I continue to think that the rise in inflation will be temporary and believe that interest rates need to stay low if the economy is to stand any chance of weathering the enormous fiscal tightening.
“I do not think that the MPC should be panicked into raising interest rates prematurely. Even if interest rates were increased only marginally, the resulting damage to the economic recovery could well mean that the rise would eventually have to be reversed again once inflation started to fall. Indeed, I stand by my long-held view that interest rates will be at 1% or below for years to come.”
