UK interest rates remain on hold

| August 5, 2010
’UK

The Bank of England’s (BoE) Monetary Policy Committee (MPC) has today elected to keep UK interest rates on hold at the historically low level of 0.5% for the 18th consecutive month, as widely expected.

Furthermore, the Bank opted not to inject any more funds into the economy via its quantitative easing (QE) scheme – introduced to stimulate growth within the economy.

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.

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 addition, last month respected economic forecaster, the Ernst & Young ITEM Club, said interest rates will stay at the historic low of 0.5% until 2014.

“A base rate of 0.5% will begin to look like the new normal,” Professor Peter Spencer from the ITEM Club said.

Professor Spencer of the ITEM Club argues that the Bank will have to maintain rates at 0.5% for more than three years to counterbalance the Government’s tough austerity measures.

In the meantime, Martin Weale was present at the this week‘s two-day rate-setting meeting. Mr Weale replaced Kate Barker after her term ended on 31 May.

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