UK interest rates remain at 0.5%

14th January 2011 Informative 761

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 it will not be clear whether they were unanimous until the minutes of the meeting are released.

At the MPC's December, November and October meetings, there was a three-way split among its nine members.

In those meetings, one member voted for a rate rise, another for more QE.

However, most MPC members continue to favour keeping rates on hold to aid the UK's economic recovery.
Weaker growth?

The most recent official figures showed that the economy grew by 0.7% in the July-to-September period, but a number of independent estimates have since said that the rate of expansion has slowed.

The latest comes from the National Institute of Economic and Social Research, which predicts that the economy grew by 0.5% in the three months to the end of December.
Meanwhile, the British Chambers of Commerce estimated earlier this week that economic growth in the fourth quarter of 2010 slowed to 0.4%-0.5%.

However, the latest official data showed that Consumer Prices Index (CPI) inflation rose to 3.3% in November, well above the target rate of 2%, led by food and furniture prices.

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.

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

In each of the last three monthly MPC meetings, Andrew Sentance has called for rates to rise in order to cool inflation, while his colleague Adam Posen has voted for QE to be expanded.

The CPI inflation rate has now remained above the government's 2% target by one percentage point or more for 12 months.Premature interest rate increases, while fiscal policy is still being tightened, risk derailing the recovery.
QE is the Bank's policy of putting new money into the financial system to try to stimulate the economy.

Mr Posen wants an extra £50bn to be added to QE programme.

Economists have warned that while putting up interest rates may help reduce inflation, it would also restrict the spending power of homeowners with tracker mortgages and people repaying other debts - further endangering the recovery.

Consumers' spending power is already being squeezed, because pay packets are not keeping up with inflation - with a report by Vocalink on Thursday suggesting that the growth of take-home pay had fallen sharply in the past three months

Consumers have also been faced with record petrol prices in recent weeks, and VAT rose from 17.5% to 20% on 4 January pushing up the cost of many goods and services.

Recent data has suggested that manufacturing is the only section of the UK economy to be showing signs of strength.

Official figures released on Thursday showed that growth in car production and food processing had helped manufacturing increase by 0.6% in November - a little faster than expected. However industrial output was slower than predicted, according to the Office for National Statistics.

"It is heartening to see dynamism in this sector of the economy," said Brian Hilliard, UK economist at Societe Generale.

"It is encouraging and it is genuine, but it is not enough to guarantee strong growth."

The British Chambers of Commerce (BCC) said the Bank of England should resist a rates rise until the economy had been given sufficient time to react to spending cuts and other austerity measures.

"Premature interest rate increases, while fiscal policy is still being tightened, risk derailing the recovery and could make it harder to implement deficit-cutting measures," said the BCC's chief economist David Kern.

He added that so long as wage increases remained modest, and disposable incomes continued to be squeezed, it was "highly likely" that there would be fall in inflation by the end of the year.

Meanwhile, business group the CBI said the Bank would come under pressure to increase rates later this year "as its anti-inflation credibility comes under greater pressure".

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Article Date: 13 January 2011 - Last updated at 15:14