Bank Holds The Base Rate At 5.5%
The Bank of England decided to hold the base rate at 5.5% in January in spite of calls for the cost of borrowing to be reduced.
The Bank's Monetary Policy Committee (MPC) met on Tuesday to decide where rates would lie for the next month, and had come under pressure to reduce the rate after increasing signs of a slowdown in consumer spending brought some poor results from high street retailers for the Christmas period. Most economists, however, did believe that rates would be held for another month, as fears persist that inflation is not yet under control.
Boss of Marks & Spencer - whose shares suffered badly this week in response to its festive sales - Stuart Rose called for a cut in the rate to relieve struggling consumers, but his hopes were dashed. There were also disappointing trading updates from DSG International - owner of Currys - and clothes store Next.
The MPC has now not cut the base rate for two months in a row since 2001, when rates came down from 5.25% in July to 4% in November. However, the chances of a rate cut in February are now fairly high, but the Bank will have to assess the impact of December's cut and a fresh set of inflation figures and prospects.
Times are tough for retailers on the high street and for those in the housing market but, consumers are finding life tough with inflation currently at 2.1% - above the Bank's target of 2% - and the threat for higher inflation with oil prices around $100 a barrel.
Even the December rate cut didn't bring the much needed relief to many home owners as not all banks and building societies passed on the 0.25% cut in full - if at all. For those who did get the full benefit, it knocked £16 off monthly repayments for a £100,000 mortgage, but there is still a net increase of £64 since August 2006.
Chief economist at Global Insight, Howard Archer, thinks a February cut is likely, saying: "We now expect interest rates to be down to 4.50% by the end of the year. Slowing growth should gradually increasingly dilute underlying inflationary pressures and open the door to significant interest rate cuts over the coming months."
CBI economic adviser Ian McCafferty remains concerned about inflationary pressures from energy and food. He said: "What probably tipped the balance in today's decision was the much greater calm in the money markets, following the injection of liquidity by the key central banks in the run up to the critical year end period. While it is still much too early to declare that markets are returning to normality, this has allowed the Bank to take its time in assessing where the economy is going for next month's meeting."
Philip Shaw of Investec thinks the economic outlook is not so bleak and that overly aggressive rate cuts would be a mistake. "Recent events should be kept in perspective. A gloomy Marks and Spencer trading statement was followed by solid news from Asda and Sainsbury's. Similarly, money markets conditions have continued to improve recently. Sterling is also weakening. Overall, our assessment is that the macro outlook justifies lower rates, but that the MPC has a number of reasons not to bring rates down too quickly. We stand by our forecast that official rates will be at 5.0% at mid-year."
Published on January 15, 2008
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