Will the Bank of England raise interest rates?
Wednesday, 06 April 2011 12:03
The Bank of England’s Monetary Policy Committee (MPC) meets tomorrow (April 7th) to decide whether to increase interest rates or allow them to stay at 0.5 per cent for a further month.
Since before Christmas economists have been having a heated discussion on firstly, whether the bank should raise rates and, secondly, when this should happen. The wider discussion has been reflected in the MPC’s own decisions with three of the nine members voting for a rate increase in the last two meetings.
The economic climate surrounding the build-up to this months meeting has been mixed to say the least. Clearly consumer confidence is low as detailed in a report out this week from the British Chambers of Commerce (BCC).
The general public is worried about job security, the public sector cuts are just about to kick-in and rising inflation is reducing the value of the pound in their pocket. The danger is that these secondary inflation effects will lead to workers demanding higher wage increases which would increase inflation still further.
Inflation rose again in February to 4.4 per cent, commodity prices and the cost of raw materials are in many cases at record levels and the continued political uncertainty in the Middle-East and North Africa means oil prices are high and unstable. All of these factors add pressure to business and consumers alike.
However, this week has also seen some surprisingly positive economic indicators that may provide the bank with some ‘wriggle room’ and make the decision on interest rates tomorrow even more tricky.
The latest Markit/CIPS service sector PMI index showed a sharp jump in output in this sector for March and the results indicate that the UK economy is likely to have grown by more than expected in the first quarter of 2011. The index also showed growth in the construction sector, another positive economic indicator.
However, results in March for the manufacturing sector show that there was a marked downturn in UK manufacturing growth, though the index is still at a positive level and growth for the first quarter of 2011 is at its fastest pace since 1994.
But the fears of the UK public and the lack of spare money in cash-strapped households are likely to influence the MPC to keep interest rates unchanged for a further month. The Bank of England will want to see further signs of economic recovery before they take a decision that will start the rise in interest rates and the pressures on mortgage holders that that will bring.
April 27th sees the first measure of GDP in 2011 for the first three months and these results are likely to form the biggest influence on an interest rate decision so it seems likely that interest rates will remain at 0.5 per cent for another month but depending on the economic and GDP data possibly increase at the Bank of England’s next meeting in May, or if the news is not good delay until the summer or even deeper into 2011.
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