Rates held at 0.5% as BoE resists rise to combat inflation

Published 10th Feb 2011

The Bank of England has kept its key interest rate at a record low of 0.5 per cent.

Shock data last month showed Britain's economy went into reverse at the end of last year, and headwinds from tax rises and public spending cuts look set to persist for some time.

Economists had been unanimous in predicting a steady rate outcome but money markets had priced in around a 20 percent chance that rates would rise to 0.75 percent.

The BoE's decision to hold fire will come as a relief to the government which is hoping loose monetary policy will cushion the blow from its fiscal tightening.

However, it will also heighten criticism that Britain's central bank is ignoring its price stability mandate. Inflation has been more than a percentage point above its 2 percent target for the past year and looks set to shoot even higher as the recent jump in oil and commodity prices feeds through.

BoE Governor Mervyn King warned last month that inflation could rise as high as 5 per cent in the coming months. But he reiterated his view that it would be back on target by early next year, due to slack in the economy and the absence of further inflationary shocks like last month's rise in sales tax.

Two other members of the BoE's monetary policy committee disagreed with that view and voted for an immediate quarter-point interest rate rise in January.

A breakdown of this month's vote will not be published until February 23.

Lee Hopley, chief economist at Engineering Employers' Federation, saidt the MPC was right to hold off on rate rises for now: 'An increase will do little to alter the path of inflation in the short term, which is being driven higher by commodity prices and tax.

'The contraction across the economy in the final months of 2010 may well have been a blip, but as the bigger risk now appears to be growth the MPC should continue to hold steady until the picture becomes clearer and the economy is firmly back on an upward track.'

And David Kern, chief economist at British Chambers of Commerce, said the held rate was widely expected.

'While we support this decision, we are concerned around growing demands for an early increase in rates. This introduces a regrettable element of uncertainty about future policy at a time when the economy is still facing major risks. Fears around inflation are understandable, but the MPC must not overreact.

'Pressures on businesses and individuals will begin to intensify over the coming months. A premature increase in rates, at a time when fiscal policy is still being tightened, will threaten the recovery. It is likely that higher interest rates will be necessary later this year -- but it is important for the MPC to wait until the economy has absorbed the initial impact of the austerity plan.'

Source: ' ThisIsMoney '

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