ChemistryEquipment: Bank holds interest rates at 0.5%

Thursday, February 10, 2011

Bank holds interest rates at 0.5%

The head of the Bank of England has forecast inflation could rise to 5% this year.

The Bank of England's Monetary Policy Committee (MPC) has kept UK interest rates on hold at 0.5%, and unveiled no new quantitative easing (QE) measures.

Both decisions were expected, but the level of division will not be clear until the minutes of the meeting are released.

At the MPC's January meeting, there was a three-way split among its nine members.

At that meeting, two members voted for a rate rise, and one for more QE.

Policymakers have been under pressure to consider raising rates from historic lows in a bid to rein back inflation.

However, data showing a surprise 0.5% contraction in UK GDP during the last three months of 2010 appeared to make an imminent rate rise less likely amid fears it would stifle recovery.

The latest official inflation data showed that Consumer Prices Index (CPI) inflation rose to 3.7% in December, well above the target rate of 2%, led by price rises in food and fuel.

“Fixed [mortgage] rates will get more expensive in the short term and so anyone wanting a fixed rate should snap one up quickly”

Ray Boulger Mortgage broker, John CharcolFixed rate mortgage costs rising

Last month, Bank England governor Mervyn King forecast that inflation could rise to 4-5% in the coming months because of higher food and fuel prices and a rise in VAT. However, he also added that inflation would fall back sharply in 2012.

So the Bank faces a difficult choice - either keep interest rates low to try to aid the economic recovery, or raise them to try to cool inflation.

Raising rates takes demand out of the economy and slows down inflation. But it also increases the cost of borrowing and there are concerns this may tip the economy back into recession.

The Bank's key interest rate has been at 0.5% since March 2009.

Business group, the CBI said that while the decision was no surprise, it expected the bank to be considering rate rises from April onwards.

Meanwhile the manufacturing group, EEF, welcomed the decision saying that while inflation was a concern, the recovery had "hit some turbulence in recent months".

“MPC has missed yet another opportunity to signal that it really is serious about controlling inflation, as well as giving savers at least some crumb of comfort that their suffering may be nearer an end”

Ros Altmann Director general, Saga

"The MPC is right to hold off on rate rises for now as an increase will do little to alter the path of inflation in the short term, which is being driven higher by commodity prices and tax," said the group's chief economist, Lee Hopley.

"The contraction across the economy in the final months of 2010 may well have been a blip, but as the bigger risk now appears to be growth, the MPC should continue to hold steady until the picture becomes clearer and the economy is firmly back on an upward track," she added.

However Saga - which provides products and services for over 50s - said that rates should have been raised, to the relief of savers.

"It's disappointing that the Bank of England has once again ignored the warning signs," Saga's director general Ros Altmann said.

She added that the MPC had "missed yet another opportunity to signal that it really is serious about controlling inflation" - saying there were signs the economy was improving despite the poor GDP figures.

A rise in rates would also have been welcomed by many savers who have seen low returns in the past couple of years - giving "at least some crumb of comfort that their suffering may be nearer an end", Ms Altmann added.

BBC's Declan Curry at the Bank of England

The BBC's Declan Curry looks at why interest rates matter

However, high interest rates would also restrict the spending power of homeowners with tracker mortgages and people repaying other debts.

Figures earlier this week from financial information service Moneyfacts suggested that mortgage rates for new borrowers and remortagers had already been rising.

It said average fixed-rate mortgages had been at their most expensive for six months at the start of February.

Lenders were finding that the cost of raising money themselves had risen in recent months and this increased cost was being passed on to customers, Moneyfacts said.

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