Bank Holds Interest Rate Again
The Bank’s monetary policy committee has once again held the middle ground for the base rate, holding it at 5%, the rate since April. Despite calls for the rate to be reduced, the MPC has obviously decided that it could not add further risk to inflation.
The Bank of England held base rates at 5% this week, deciding not to reduce rates, despite pressure to do so from economists wanting a cut to help boost the struggling economy.
In the end the Monetary Policy Committee (MPC), which sets the rate for the Bank, decided that with inflation already at 4.4% - much higher than the target of 2% - and destined to go higher in the short term, it could not risk further fuelling inflation.
Latest figures from the British Retail Consortium showed this week that food prices leapt by 10% in August, with an 11.9% rise for fresh produce. THE MPC could not risk adding to that sort of burden.
Good news this week came from the Chartered Institute of Purchasing and Supply which gave evidence of less pressure on the UK service sector, thereby making the need for a rate cut to boost consumer spending less urgent.
The last two MPC meetings have been split on whether rates should go up or down, and this was probably the case again in this week’s decision meeting. Most members, however, held the middle ground of no change. The rate has been 5% since April.
Economists still predict that rates will come down in 2008 – probably to 4.75% by the end of the year - with further reductions through 2009. The rate may even be brought down as low as 3.5%, in some experts’ views.
This is based on the fact that the economy needs a boost, and predictions for the CPI inflation rate to come down to 1.9% in 2010 and to 1.6% in 2011.
As inflation comes back under control, there should be a clear case for rate reductions. In the mean time, however, the MPC has deemed it prudent to maintain the balance and not risk making moves that may push inflation upwards, which would be rightly seen as unforgivably foolish were it to happen.
