Third straight rate hold from Bank

Thursday 10th July 2008

The Bank of England today maintained interest rates at five per cent for the third month running.

The monetary policy committee (MPC) voted to maintain interest rates where they have rested since April – as the economy starts to slow.

The MPC is currently trapped between high inflation and a slowing economy.

An interest rate cut traditionally buoys an economy – making borrowing easier – but high inflation is cut back by increasing the cost of borrowing.

Bank of England chief Mervyn King has repeatedly stated he feels inflation is a greater ill and allowing rising prices to get out of hand would cause greater long-term damage to the economy.

The MPC's single target is to main price stability by keeping inflation – as measured on the consumer prices index (CPI) – down to two per cent.

CPI currently stands at 3.3 per cent and is expected to rise further – off the back of higher food, fuel and energy prices – even as high as four per cent, before falling back.

However, the MPC believes price rises beyond this are unlikely d inflation should fall back in 2009.

It is uncertain whether further oil and food price rises will continue and high wages deals – as workers pushed for more as the cost of living rises – could maintain upward pressure on inflation.

The low pound is also pushing up inflation as the cost of imports increase.

Analysis by capital Economics shows, after excluding the effects of the oil price,
import price inflation has risen from 2.3 per cent a year ago to a 14-year high of 8.6 per cent.

While inflation is usually culled by rising interest rates – the Chartered Institute of Personnel and Development (CIPD) is warning a future rate hike could hit employment gravely.

CIPD chief economist John Philpott said: "Many employers have their finger on the redundancy trigger.

"They are not yet ready to start firing but a rise in interest rates would probably be enough to cause a substantial jobs cull come the autumn. And once this starts the economy could witness a sudden 'avalanche' of redundancies."

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