BoE expected to keep interest rates on hold tomorrow

| September 8, 2010 | 0 Comments

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 19th consecutive month.

Many economists expect no movement on interest rates until early 2011.

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

However, at the last three meetings, policymaker Andrew Sentance voted for rates to rise from their historic low.

Mr Sentance is again expected to vote for a rate hike tomorrow because of concerns about inflationary pressures.

Howard Archer, economist at IHS Global Insight, told Reuters: “We suspect that the other eight MPC members will conclude that the serious headwinds facing what is still overall a muted recovery from a very deep recession warrant unchanged rates.”

He added: “Indeed, if the MPC does make any adjustments to monetary policy in the near term, it is most likely to be to revive QE.”

However, there has recently been speculation that the Bank might elect to hike interest rates to combat stubborn inflation.

The CPI inflation rate currently stands at 3.1% – the eighth consecutive month that inflation has been above the 2% target.

The CPI inflation rate is a benchmark for the MPC but Mervyn King, the Bank’s Governor, has already dismissed fears that higher inflation would demand a significant rise in interest rates in the months ahead.

Last month, however, influential think tank, the Policy Exchange, warned interest rates may be hiked to 8% by 2012, in order to combat inflation.

The Policy Exchange‘s chief economist, Dr Andrew Lilico, believes a double-dip recession is possible, which would then be followed by a boom – fuelled by huge monetary growth.

Together with massive Government spending cuts, this could result in the fastest economic growth rate since the late 1980s, according to Dr Lilico.

Dr Lilico said: “Once the economy gets growing sustainably, there will be a huge expansion in the money supply, which will lead to inflation.

“Once inflation rises, interest rates will rise rapidly as well. Since interest rate rises will raise mortgage rates, the initial effect will be even more inflation,” he added.

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

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