Interest rates held at five per cent
Interest rates held at five per cent
Thursday 7th August 2008
Interest rates have been held at five per cent for the fourth consecutive month by the Bank of England.The rate-setting monetary policy committee (MPC) is currently torn between the need for lower interest rates to boost spending and the need to counter high inflation – currently at 3.8 per cent compared to a two per cent target.
Recent economic news has also increased this division.
Shop prices – and in particular food prices - are continuing to rise, the British Retail Consortium reported yesterday, and high street spending is dwindling.
However, recent falls in the oil price are boosting hopes inflation will eventually come down next year, along with muted rises in pay deals.
Furthermore, the slowdown in the property market. along with the loitering credit crunch, strengthen calls for a interest rate cut.
It is the Bank's view that the consumer prices index (CPI) will remain high in the coming months before starting to fall come the end of the year.
However, in the last meeting the MPC admitted inflation could go higher and the downturn could be deeper than previously forecast.
It is still uncertain whether the Bank will decide it is necessary to shunt inflation with an interest rate rise, before the cost of borrowing can start to fall again.
Howard Archer, chief UK economist at Global Insight, said: "We anticipate that interest rates will stay at five per cent until the end of 2008 (although we would not rule out a cut in November) before being cut steadily to 4.25 per cent by mid-2009 and to 3.75 per cent by the fourth quarter of next year.
"We expect that very weak economic activity to increasingly contain and then dilute underlying inflationary pressures."
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