Bank of England maintains interest rates at 0.5 per cent
The Bank of England's Monetary Policy Committee (MPC) have kept interest rates at 0.50 per cent for the 27th consecutive month against a background of fiscal tightening, low domestic demand and weak consumer demand.
The committee also voted to maintain the asset purchase programme or quantitative easing at £200 billion.
Howard Archer, Chief UK & European Economist for IHS Global Insight said: “The Bank of England's decision to keep interest rates down at 0.50% despite well above-target and rising inflation undoubtedly reflects major concerns within the MPC over both the current softness of the economy and the outlook, particularly given that fiscal tightening increasingly kicked in from April.”
This was the first meeting since the MPC's chief hawk, Andrew Sentance, has left the committee. Mr Sentance had led the calls for a rate rise in the last few months and his departure from the MPC means that a vote to change base rate was less likely, though it remains to be seen what side of the fence his replacement, Ben Broadbent, will vote on. The minutes to this months meeting will be published on June 22nd.
Richard Barker, mortgage manager at N&P, said: ”Today’s decision to leave the Base Rate unchanged at 0.50% was fully expected across the industry. Many economists now believe that Base Rate may not rise until 2012. So for the moment, those on a variable rate, or tracker have more time to consider their options. The news will also come as a welcome relief to many potential first-time buyers looking to get on the first rung of the housing ladder.”
The MPC has voted 6-3 to keep interest rates at 0.5 per cent in the last few months with fellow members Martin Weale and Spencer Dale joining Departing member Andrew Sentance in calling for a rate rise.
The Bank of England is under pressure from various sources. On the one hand, inflation is increasing and there is an argument that a rise in interest rates would help combat this problem. on the other hand, spending cuts, job insecurities and negative economic data from the manufacturing, construction and services sector just this week illustrate just how fragile the UK economy is, and a rise in rates could push households too far.
Many experts believe that a rate rise could be delayed until 2012 now. The decision will, in part, be influenced by GDP growth figures, the first estimate of which is due from the Office for National Statistics (ONS) on July 26th. A recent report from Markit that looked at the PMI index scores from the manufacturing, construction and most importantly services sectors for May, suggests that GDP growth may struggle to exceed 0.3 per cent.
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