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August 4, 2010    

BoE expected to keep interest rates on hold tomorrow

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by Kay Murchie

The Bank of England’s Monetary Policy Committee (MPC) is tomorrow expected to keep UK interest rates on hold at the historically low level of 0.5% for the 18th consecutive month.

Furthermore, all members of the MPC are expected to keep the quantitative easing programme (QE) on hold.

QE, also known as printing money, is a process whereby the Treasury injects funds into the financial system to ease pressure on banks by giving them extra capital.

Interest rates have stood at the record low since March 2009, when the Bank also embarked on its QE programme. At the time, the economy was in the midst of its worst recession in more than five decades.

However, at last month’s meeting, policymaker Andrew Sentance once again voted for rates to rise from their historic low.

Meanwhile, last week, the Bank’s Governor, Mervyn King, reiterated that interest rates will stay at 0.5% for some time to come.

Mr King said: “It’s right to keep our foot firmly on the monetary accelerator”, adding he is more concerned about the strength of the recovery than inflation.

There has been speculation that the Bank might elect to hike interest rates to combat stubborn inflation – which at 3.2% is way above the 2% target.

The CPI inflation rate is a benchmark for the Bank’s MPC but while inflation is expected to stay above the 2% target for much of next year, interest rates are not expected to change.

In the meantime, Martin Weale will join the MPC for the two-day rate-setting meeting. Mr Weale replaces Kate Barker after her term ended on 31 May.

Mr Weale is one of four external members appointed by the Government and for the past decade and a half has been in charge of the National Institute of Economic and Social Research (NIESR) – an influential think tank which provides regular updates on economic trends.

At the last two meetings, the MPC comprised just eight members instead of the usual nine.

The Bank of England will announce its decision at 12.00pm tomorrow.

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