No surprise as interest rates remain on hold

Posted on February 11th, 2011 | Categories - News

The Bank of England’s Monetary Policy Committee (MPC) resisted any urge to increase interest rates and has left them on hold at 0.5%.

No new Quantitative Easing (QE) measures were unveiled either. The move does not come as a surprise, however it will be interesting to see just how close the voting was. Last month two members of the MPC wanted to increase rates and the Bank has been coming under increasing pressure in light of recent rises in inflation.

However, recent weak economic data, which showed that the economy actually contracted by 0.5% in the last quarter may have persuaded members of the MPC that now is not the right time for a rise in interest rates. Mervyn King has indicated that he expects inflation to rise during 2011, the Bank therefore faces a delicate balancing act over the next few months. Do they increase interest rates to try and reduce inflation or do they leave rates low to try and stimulate the economy?

Only time will tell which way the Bank will jump, however the picture may become clearer when the votes from the last meeting are revealed.

The reaction to the news was mixed. Lee Hopley, Chief Economist of manufacturing group EEF said: “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”.

She went on to say “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”.

However, Ros Altman of Saga, gave the opposite view saying “it’s disappointing that the Bank of England has once again ignored the warning signs”.

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.

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