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July 28, 2010    

BoE in no rush to hike interest rates

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by Kay Murchie

Speaking in front of the House of Commons’ Treasury select committee, the Governor of the Bank of England, Mervyn King, has reiterated that interest rates will stay at the historic low of 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 Monetary Policy Committee (MPC) but UK interest rates have been at the historically low level of 0.5% since March 2009.

Inflation is expected to stay above the 2% target for much of next year, due to the VAT rise due to come into force in January.

However, one of the MPC’s members, Andrew Sentance, continues to question how long interest rates can remain at this historically low level and has voted twice now to lift interest rates to combat inflation.

In the meantime, Mr King was more optimistic than many other economists about the UK’s growth prospects.

The Government’s fiscal watchdog, the Office for Budget Responsibility, believes growth will be 1.2% this year with growth almost doubling in 2011 - Mr King has today described the figures as not “unreasonable”.

However, today, influential think tank, the National Institute for Economic and Social Research (NIESR), believes the economic recovery will be slower than the Government anticipates.

The NIESR has joined many other business groups in predicting that growth in the second half of 2010 will be weak as a result of massive spending cuts.

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