Interest rates on hold for 18th month
Thursday 09 September 2010
The Bank of England maintained its emergency support for the economy today by keeping interest rates at 0.5% for the 18th month in a row.
Policymakers also continued with the Bank's £200 billion quantitative easing (QE) programme amid uncertainty over the path of the UK's recovery.
While the UK economy rose by a far better-than-expected 1.2% in the second quarter, recent data has pointed to sharply slower growth since then.
Fears that UK exporters will struggle to fill the gap left by weaker Government and consumer spending were highlighted earlier in the day when figures showed a record deficit in the trade of goods during July.
Recent surveys from the manufacturing and services sectors have also suggested the rally may be fading as firms begin to see much slower demand.
This week's demise of social housing giant Connaught - the first high-profile casualty of the austerity drive - added to fears over the impact on the recovery.
The Bank's nine-strong Monetary Policy Committee (MPC) has left rates unchanged at their historic lows since March 2009.
Rates have been on hold for the longest spell since the Bank was given responsibility for setting monetary policy in 1997.
The previous record during the MPC's time was when rates were on hold at 4% for 15 months, between November 2001 and February 2003.
MPC members are torn between the pressures of stubbornly high inflation and the threat of a double-dip recession.
But a split is emerging among members, with above-target inflation leading Andrew Sentance to vote for a quarter-point rate increase in the previous three months.
Consumer Prices Index (CPI) inflation was 3.1% in July and warnings suggest cost pressures will worsen, with food prices expected to increase over the coming months.
Experts at Barclays Capital believe CPI edged up again in August, to 3.2%, which could leave the MPC facing a further dilemma.
However, the majority so far opted to prioritise the need to support the economy over efforts to rein in inflation and experts believe this is likely to remain the case for at least the rest of the year.
The British Chambers of Commerce (BCC) welcomed today's decision and said a worsening outlook ahead of the looming spending cuts should mean rates stay on hold well into 2011.
David Kern, chief economist at the BCC, said: "The Government's tough deficit-reduction measures, although necessary to repair the public finances, will increase the threat of an economic setback.
"Since sustaining the recovery must remain the priority, it is absolutely vital that the MPC maintains the current low level of interest rates until the middle of 2011 at the earliest."
Experts believe the most likely next move will be to offer more support to the economy through an increase in QE.
The latest report from the Organisation for Economic Co-operation and Development (OECD) today warned that central banks across the G7 economies may need to increase support measures.
It also said severe austerity action may need to be put on hold as the recovery slows more sharply than expected, although its forecasts for the UK are among the strongest of all the seven major economies.
Philip Shaw, economist at Investec Bank, said: "The economy does not yet have the ability to stand on its own two feet, particularly with the uncertainties over the effects of the forthcoming fiscal squeeze, and accordingly the first rise in rates looks some way off."
He added that further QE could be on the cards, although the MPC is not expected to act until it gets sight of the Bank's next quarterly inflation forecast in November.
"However, barring the economy posting signs of a sudden lurch downwards, our central case is still that the committee will elect not to restart QE purchases and that the first rate rise will occur in the second quarter of next year," said Mr Shaw.
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