Interest rates remain on hold
The Bank of England, as expected, keeps interest rates at a record low of 0.5 per cent, despite growing pressure to put them up.
Three members of the nine-strong Bank of England monetary policy committee voted for a rise last month – and others are said to have come close to backing them.
Andrew Sentance, who is leaving the MPC in May, voted for the largest increase – the more hawkish Martin Weale and the bank’s chief economist Spencer Dale voted for a 0.25 per cent hike.
The reason? Increasing concern about inflation, which has risen to 4 per cent over the last year – and some better news on the economy, with improvements for manufacturing and record exports in oil, food, drink and tobacco.
>However the rest of the MPC has fallen behind Governor Mervyn King, who’s still concerned about the fragile state of the British economy – after figures showed that it shrank by 0.6 per cent in the last quarter of 2010. They argue that a decision on rates wouldn’t be wise before finding out how the economy’s performed in the first three months of this year – and that won’t be clear until May at the earliest.
The British Chamber of Commerce urged the MPC to show restraint – saying an increase at this stage would be too risky. Their chief economist David Kern said any decision should be postponed: “Premature interest rate increases risk derailing the recovery, and avoiding an economic setback must remain a top priority.” Many businesses are worried that an increase would just end up plunging them into debt – while most mortgage holders would also be hit hard.
On top of that, it’s less than two weeks before Chancellor George Osborne unveils his budget on 23 March. In fact, the bank’s only made one rate change in the month of March since it was made independent in 1997 – and that was when it launched it’s unprecedented quantitative easing programme to inject large amounts of money into the economy, two years ago.
But all of this doesn’t mean rates will stay this low for ever. The markets have already factored in a rise later this year, widely considered to be August. They’re hoping that by then, the economic recovery will be more secure – and there’ll be less risk of pushing Britain into that widely feared double-dip recession.
The CBI‘s chief economic advisor Ian McCafferty said there was also a risk that inflation could become more entrenched, if workers kept pushing for higher wages, to cover the increased cost of goods and fuel. “By acting early, the bank can keep inflation expectations under control, preventing the need for more aggressive action later on”.