Interest rates on hold again

Posted on May 10th, 2012 | Categories - News

The Bank of England’s Monetary Policy Committee (MPC) has left interest rates on hold at 0.5% for a further month.

It also announced there would be no increase to the existing program of Quantitative Easing (QE).

Interest rates

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Despite relatively high inflation, which rose to 3.5% in March and is well above the Bank of England’s 2% target, base rate has now been on hold at 0.5% for over three years. Today’s news seems to confirm that the MPC are prioritising the economic recovery ahead of dealing with inflation. Although the minutes from April’s meeting showed that the MPC are becoming increasingly worried about inflation, which maybe explains why additional QE measures have not been taken.

The MPC are in many ways walking a tightrope, with many experts feeling that with the economy sluggish and back in recession, further QE can’t be avoided, which in turn could create further inflation and increase pressure to push up interest rates, which will hamper any economic recovery.

Ian McCafferty, CBI Chief Economic Adviser said: “The combination of sluggish activity and sticky inflation put the MPC in a difficult position, and this decision is likely to have been a close call.”

“With economic conditions subdued, and signs of euro-area tensions building again, another round of QE cannot be ruled out.”

Peter Dixon of Commerzbank also believes that inflation is a worry: “Given that the MPC will have had access to forecasts which are quite likely to have shown a sharp reduction in their growth forecast this year and probably next, it’s evidence the committee is very concerned about inflationary pressures.”

“You might get more QE in response to the Eurozone problems, but the Bank of England has wisely decided to keep its powder dry in case it needs to do more in future,” he said.

Savings interest rates

As usual group representing savers greeted the news with dismay.

Savers are struggling to find interest rates to beat inflation, which now seems to be on the rise again, and the news that base rate will remain on hold for another month will do nothing to cheer up beleaguered savers.

Even the best buy savings accounts are struggling to keep pace with the cost of living, for example a 20% tax payer has to tie up their money for four years to beat the current levels of inflation, whereas there are no accounts available for a 40% tax payer which will beat the current level of CPI (Consumer Prices Index).