MPC likely to leave interest rates on hold

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The Independent Online

The bank of England's Monetary Policy Committee is today almost certain to welcome the new government of the UK with a move to leave interest rates on hold at 0.5 per cent for the 14th month running. The MPC will also leave its £200bn programme of quantitative easing unchanged.

The committee, which began its May meeting on Friday, rather than holding the usual two-day summit that begins on a Wednesday, in order to avoid any danger of politicising its decision during the election, is still expected to leave rates at their current record low for much of this year.

While inflation has continued to spike upwards – at 3.4 per cent in March, it was well above the 1 percentage point margin for error that the Bank is permitted either side of its 2 per cent target – the MPC is acutely aware that the economic recovery remains exceptionally fragile.

The minutes of the April MPC meeting did suggest that some members of the committee have become a little more anxious about inflation, particularly following the sharp rise seen in oil and commodity prices in recent months. As a result, factory gate inflation came in at 5.7 per cent last month.

In theory, the £200bn QE programme could exacerbate those inflationary pressures, meaning that price rises would not come down as quickly as the MPC expects during the second half of the year.

Nevertheless, with GDP growth having come in at only 0.2 per cent during the first quarter of the year, according to the Office of National Statistics, the MPC continues to worry more about deflationary factors.

More recent economic indicators have suggested that the pace of recovery may now be picking up, but the committee's members will also be acutely aware of the sovereign debt crisis in the eurozone, which began in Greece but has been spreading throughout the European Union.

Any sign that the crisis is beginning to damage the economies of the eurozone would have a serious knock-on effect on the prospects for UK growth.

Britain's uncertain political situation is also likely to be a factor in the MPC's decision. The committee may be reluctant to firm up the direction of monetary policy before it has a clearer view of the shape of the next government and the fiscal policy decisions it might take.

Howard Archer, chief UK economist at Global Insight, said the combination of so many uncertainties would leave the MPC with little choice but to leave interest rates and QE unchanged. When interest rate rises are brought in, possibly next year, they are likely to be "gradual and limited", he said.