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Interest rates held at record low for another month

London, UK (08/07/2010)

LONDON (Management Today) The Bank of England's MPC has kept the base rate at 0.5% for the sixteenth month running.

The move was widely anticipated, despite some calls recently for a rise to offset the risk of inflation, which remains stubbornly high at 3.4% (CPI).  But the combined effects of evidence that house prices are in trouble again and the prospect of the deepest cuts in public spending in living memory seem to have persuaded the committee members that ‘negative growth’ and deflation are more of a risk than rising prices.

The committee also voted for no change in the quantitative easing policy, which will remain at £200m as before.

We’re getting so used to this continuing ‘ultra-loose’ monetary policy that the monthly rate announcement seems to have lost some of its drama. But at least one committee member doesn’t share that view – the unnamed MPC’er claiming to have lost sleep over the possible risks of choking off the fragile recovery too soon. 

And it’s this fear that is driving the decision to keep rates at their historic low – the IMF last night downgraded its growth forecast for the UK to only 2.1% for next year. That’s well below not only Treasury predictions of 2.3%, but also its own previous estimate of 2.5%. In fact it’s one of the biggest downgrades the IMF has made to any major economy recently. Oh good.

What’s more the main reason for the downgrade is the crisis in the Eurozone, so there’s not even very much we can do about it. Apart from trying to persuade the Germans to put their hands in their pockets for all our sakes.

Back on the interest rates, the decision seems prudent at least for now given that the recovery is going to face a big enough challenge as it is from the huge cuts in public spending which are on the way.

Unemployment is almost bound to rise again, which will make it less likely that wage inflation will take off even if prices start to rise (and with VAT up to 20% from January, they will).

That is of course providing that the coalition government manages to achieve cuts of anything like the 25% they say they want to. We don’t think they are going to find that as easy or as quick as they seem to be suggesting at the moment.  Making a plan is one thing, executing it is quite another, as many an enthusiastic young administration has discovered to its cost.

And if they don’t, the picture could be very different. Inflation may seem like the lesser of two evils at present, but history shows us how quickly it can turn around and bite you on the bum. It’s going to need steady nerves all round at the MPC for quite a while yet.

For more infromation, please visit: http://www.managementtoday.co.uk/newsalerts/dailynews/news/1015058/Interest-rates-held-record-low-month/?DCMP=EMC-Daily%20News



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