UK interest rates expected to remain on hold

| September 8, 2011

The Bank of England’s Monetary Policy Committee (MPC) commenced its two-day rate-setting meeting yesterday and interest rates are expected to remain on hold at the record low of 0.5% – where they have been since March 2009.

The bank is presented with a dilemma as it comes under pressure to raise interest rates to combat stubbornly high inflation – which is currently running at more than double the 2% target.

Inflation is forecast to reach 5% later this year.

However, the economic recovery is faltering and the central bank has said it is reluctant at this stage to lift interest rates as it could be harmful to the recovery.

Some economists believe the bank will not lift rates again until 2013.

A recent slew of weak data also points to low interest rates for the longer-term but some analysts believe the Bank of England should consider a fresh round of quantitative easing (QE) if weak economic growth continues – a scheme designed to boost the economy.

Manufacturing, construction and service sector activity were all weak last month, while yesterday it was revealed that factory output fell unexpectedly in July.

House prices are also weakening and experts believe if the economy continues to weaken, house prices will continue their downward trend.

At last month’s meeting, all nine members of the MPC voted to keep interest rates at the historic low of 0.5%, while Adam Posen, once again, called for an injection of £50 billion via the QE scheme to boost the economy.

Mr Posen has called for a fresh round of QE since October 2010.

Last month, policymakers Martin Weale and Spencer Dale dropped their call for higher interest rates and joined their fellow Committee members by opting to keep rates low to stimulate the recovery.

The Bank of England will announce its decision today at 12:00pm and minutes of the meeting will be published on 21 September.

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