Interest rates stay at 0.5% as Bank of England reassures markets

Published 10th May 2010

The Bank of England has kept interest rates at a record low of 0.5 per cent for the 14th consecutive month, it announced today.

The Bank’s Monetary Policy Committee (MPC), which postponed its rate meeting and announcement last week because of the general election, also voted to keep the limit on quantitative easing unchanged at £200 billion.

The move was widely expected by analysts, who said that the likelihood of any change in rates was minimised further after the election delivered a hung Parliament.

Graeme Leach, chief economist at the Institute of Directors, said: “Given the political and fiscal uncertainty enveloping the country, and a mixed bag of evidence on the strength of the recovery, financial markets didn’t need any surprises. It made sense to leave interest rates and quantitative easing unchanged.”

The minutes of the committee’s deliberations will not be published for another fortnight, but the markets will get some insight into the Bank’s thoughts on the economy and inflation forecasts when its quarterly Inflation Report is published on Wednesday.

Worries over inflation had increased after the Bank’s target measure of CPI inflation jumped to 3.4 per cent in March from 3 per cent in February, but economists said that it was unlikely to be enough to prompt a rate increase.

The economy grew by 0.2 per cent in the first three months of the year, the first official estimate showed, but this figure will be updated in two weeks’ time.

Some economists warned that a prolonged political vacuum could force the MPC’s hand. David Kern, chief economist at the British Chambers of Commerce, said: “Risks of adverse market reactions to the inconclusive election result increase the threats to our credit rating. The MPC will not be able to ignore the inflationary consequences if sterling and the gilts market come under serious speculative attacks.”

Source: ' Times '

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