By Max Clarke
The Bank of England’s (BoE) Monetary Policy Committee (MPC) convened today, voting to keep the official Bank Rate paid on commercial bank reserves at 0.5%. This marks the 22nd consecutive month of the lowered interest rate- first implemented in March 2009 in order to make credit more available in light of the worsening “credit crunch”.
Following the recent cuts in public spending and the VAT increases, the decision to maintain the lowered interest rate will be welcomed by UK business.
Commenting on today's news, David Kern, Chief Economist at the British Chambers of Commerce, said:
"The MPC's decision to leave interest rates and the quantitative easing (QE) programme unchanged this month was widely expected. We support this decision, but it is important that the MPC perseveres with the existing policy approach, at least until the middle of the year. Recent calls for early increases in rates are ill advised and should be rejected.
“The UK recovery is fragile and risks of a setback are serious. Pressures on businesses and individuals will intensify over the next few months, but we urge the MPC not to over-react to temporary increases in inflation. As long as wage increases remain modest, and disposable incomes continue to be squeezed, it remains highly likely that the surge in inflation will be reversed, and sharp falls can be expected in the final months of 2011 and in 2012.
“It is likely that interest rates will need to increase later this year. But the MPC must wait until the economy has absorbed the initial impact of the austerity plan. 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.”
With the consumer price index (CPI) showing rates of inflation of 3.3% for November 2010, and Adrian Lowery from This is Money predicting that this figure could rise to 4%- double the MPC's own targets of 2%- by spring, when the VAT and fuel duty rises take effect; the committee's decision not to announce any further quantitative easing will also be welcomed.
The MPC's evident inability to control CPI could seriously test the credibility of the committee, and in light of this rising inflation the MPC will likely be raising interest rates in the foreseeable future- a move that MPC member Dr. Andrew Sentance has repeatedly called for.
The BoE’s Asset Purchase Programme will also remain at £200 Billion- a figure unchanged since the decision to increase the sum by £25 billion on 5th November 2009.