Interest Rates Kept At 5.25%

Following yesterday's meeting the Bank of England's Monetary Policy Committee (MPC) has opted to keep interest rates on hold at the current rate of 5.25%.

The decision comes as no surprise as many analysts had already predicted that any further rate cuts would take place later on in the year. The Bank is currently struggling to balance the threat of a slowing economy amid pressures of rising inflation. Interest rates were cut by a quarter of a percentage last month from 5.5%, marking the second cut since December last year.

Unlike the US, where the Federal Reserve has lowered rates to the current 3%, the Bank of England’s policy makers have been much less dramatic in their decisions.

The MPC was faced with a difficult decision as the data under analysis indicated both rising prices as well as a slowdown in economic growth.

Figures produced by the Chartered Institute of Purchasing and Supply (CIPS) showed that the price of UK manufacturer's products had risen in February to its highest level in eight years. Despite recent figures for the UK economy indicating a 0.6% upward turn for the last quarter of 2007, consumer spending underwent a considerable decline for the same period.

In addition, Halifax, the UK's largest mortgage lender, said that house prices up and down the UK were continuing to slow.

The overall opinion is that the interest rates will remain as they are at least until May, with forecasts of a drop to 5%.

Howard Archer of Global Insight, the 'global leader' in economic and financial analysis, said:

"A move in April cannot be ruled out, but it would probably only occur if economic data deteriorate markedly over the coming weeks."

Likewise a spokesman for the Royal Bank of Scotland said:

"We expect one more rate cut this year, most likely in May, unless economic conditions weaken substantially."

But mixed reactions were also voiced following the MPC's interest rate decision. Economic adviser to the British Chamber of Commerce Mr David Kern has called on the MPC not to prolong a further cut until May but to bring it forward to April. He said:

"The decision is not surprising, but we believe the decision is mistaken, given the worsening international and domestic situation."

He added, "We do not disregard the inflationary risks arising from surging food and energy prices, but countering the immediate acute threats to growth must be given a greater priority."

Both the EEF manufacturer’s organisation and the Institute of Directors welcomed the MPC's decision to hold back.

Graeme Leach, chief economist for the Institute of Directors said:

"It comes as no surprise and wise. The last thing the economy needs is for an overly aggressive easing in policy now, which has to be reversed later in the year. Unless the evidence shows the economy slowing faster than expected, the Bank should continue to reduce rates gradually."

Published on March 7, 2008