Breaking News: Interest rates held by MPC

THE Bank of England today held interest rates at 5.50%.

The move did not surprise economists and the business community who felt that it was always unlikely that the Bank's nine-member Monetary Policy Committee would vote for a second cut after the 0.25% reduction in rates in December.

The decision is likely to disappoint retailers who had called for a cut after poor Christmas sales figures. High street chain Marks & Spencer and Currys owner DSG are among the retail group who have announced disappointing festive sales in recent days.

Business leaders said they were not surprised but the MPC now needed to be vigilant. Analysts believe that a further quarter point cut may come next month as the Bank looks to arrest rising inflation.

Ian Williams, Leeds Chamber of Commerce policy director said: “Many in the local business community will have expected the MPC to keep interest rates on hold.

“Coming into the New Year initial reports from retailers in Leeds have in the main highlighted poor trading on the high street over Christmas.

A reduction in rates today would have helped with increasing disposable income, thereby encouraging spending. In addition we have seen significant rises in utility prices, which will again hit disposable income.

“Going forward, the MPC now need to, very closely, monitor UK economic performance and take prompt remedial action in the form of a half per cent cut in February, waiting any longer would be a mistake,” said Mr Williams.

The CBI's chief economic adviser Ian McCafferty said: “The MPC was presented with a plethora of potentially conflicting data over recent weeks, which fuelled uncertainty about which way it would vote today. And while it is clear that a further cut is already in the pipeline, the exact timing has been harder to call.

“The economic news over Christmas was mixed, and the severity of the slowdown difficult to determine. At the same time, inflationary pressures from energy and food costs remain worrying.

“What probably tipped the balance in today's decision was the much greater calm in the money markets, following the injection of liquidity by the key central banks in the run up to the critical year end period. Three-month LIBOR spreads have fallen to their lowest since last August.

“While it is still much too early to declare that markets are returning to normality, this has allowed the Bank to take its time in assessing where the economy is going for next month's meeting,” he said.

Graeme Leach, chief economist at the Institute of Directors (IoD) said: “The Bank of England went for hold instead of bold and probably made the right decision. The Bank has decided to wait another month in order to fully assess the growth and inflation performance over the December-January period. With oil prices nudging $100 and a general energy price spike, January's inflation number could turn out bad. The Bank retains a bias towards easing and in all likelihood will act in February providing the January CPI isn't too bad.

“The MPC is aware that stickyflation will be the problem this year, with a sharp slowdown in output growth against a background of resistant inflation. This won't prevent further interest rate reductions but it will limit the Bank's room for manoeuvre.”

Jonathan Peasgood, head of investment at property services group GVA Grimley, said: “Early action on interest rates is required to prevent an economic downturn becoming more serious.

“Recent survey data shows a marked weakening in sentiment by consumers, producers and the financial sector, but the fear of higher inflation and a weaker pound means the Bank of England's scope for action is arguably limited – it will have to tread carefully.

“Nevertheless, interest rates must fall to prevent a severe downturn developing, so delaying this decision by a month or so seems hard to justify and could be counter productive – interest rates need to fall to 4.75% or lower in the first half of this year.

“The occupier market will weaken this year, but early significant action on interest rates should limit the effect on employment growth, occupier demand and rental growth and will also help to lessen the cost of borrowing and the rise in property yields,” added Mr Peasgood.

Tim Charge, senior partner at PricewaterhouseCoopers in Hull, said a cut in interest rates would have been welcome.

Mr Charge said: “We understand the dilemmas that faced the Monetary Policy Committee. After cutting rates in December, the committee's natural inclination was probably to wait until at least next month. Therefore a decision to wait wasn't surprising, but in our view it was the wrong one.

“Given the immediate challenges facing the economy, the risks of waiting are greater than the risks of acting early. By deciding not to cut interest rates the committee has increased the risk that emergency measures will be needed later in the year.”

Chris Glen, regional policy chairman for the Federation of Small Businesses in Yorkshire, said: “It's disappointing that we haven't had a cut this month but we know it's coming.

“The economy is sluggish, retailers have had a dreadful year, the housing market is stalling and many small businesses are struggling as a result.”