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Interest rates unchanged at 5.75%

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by Kay Mitchell

The Bank of England’s Monetary Policy Committee elected to keep interest rates at 5.75% yesterday in spite of pressure to cut rates to aid economic growth and avoid potential pitfalls of prolonged high rates.

Leading City figures, trade unions and retailers have been urging the bank to cut rates. Ernst & Young recently commented that a reduction in interest rates would improve investor confidence at the Bank of England and drive investment in business and the economy overall.

Inflation is running below the 2% target at 1.8% so the Bank is concerned that increasing oil and food prices will force it higher in the short-term.

Analysts believe that the next rate move will be down and could come as soon as November. Many are predicting further rates in early 2008.

A spokesperson for the London Chamber of Commerce and Industry said that they were disappointed that rates weren’t cut. Confidence in the capital’s economic prospects has declined recently to levels not observed since 7/7. A modest reduction this month was much needed.

Lending between banks has frozen in recent weeks triggering the crisis at Northern Rock. Last month, the US Federal Reserve reduced rates by half a percentage point to free up lending and the Bank of England was under pressure to do the same here.

However, the decision to keep rates the same was welcomed by the CBI, they commented that an interest rate cut was unlikely this month as there are still few signs of any serious damage to the real economy from the turmoil in the money markets.

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News posted: October 5, 2007

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