Bank of England highlights fears over economic recovery

Click to follow
The Independent Online

Expectations that interest rates will stay on hold until well into next year were reinforced today after the Bank of England highlighted increased fears about the strength of the economic recovery.

July minutes of the Bank's monetary policy committee meeting showed that policymakers voted seven to two to hold interest rates at their record low of 0.5% despite inflation of more than double its 2% target.

The committee said inflation is expected to push beyond 5% and will reach its peak more quickly than it previously expected, partly as a result of recently announced gas and electricity price hikes.

But it declined to raise interest rates to beat down the rising cost of living, because of fears that a rise would damage the fragile economic recovery.

The risks posed by the eurozone debt crisis to the UK's economy remained substantial, it said. Also, the pace of global activity had slowed following the disruption caused by the Japanese tsunami and the effects of the rising price of oil which had been pushed higher by uprisings in the Middle East and North Africa.

As a result, it expected GDP to have grown only moderately in the second quarter of 2011, while the outlook for the third quarter appeared to be "softening".

"It was likely that the current weakness in activity would persist for longer than previously thought," the minutes said.

However, there was little further discussion of a second round of money printing, or quantitative easing, to help boost the economic recovery.

Howard Archer, chief economist at IHS Global Insight, said: "The underlying tone of the minutes comes across as distinctly more dovish, which indicates that any hiking of interest rates is disappearing further into the future."