Bank of England base rate held at 5%

05 June 2008 / by Joy Tibbs
The Bank of England's Monetary Policy Committee (MPC) has voted to maintain the base rate at five per cent. The decision provoked little surprise among experts, many of whom believe inflation, which has continued to rise, has been the key factor in the decision-making process.

Abbey chief economist, Barry Naisbitt, points out that: "Consumer price inflation rose from 2.5 per cent to three per cent in April. With increasing signs of slowing output growth, the majority of MPC members must have judged that the most recent evidence of slowing economic activity needed to be balanced against both their expectation that activity would slow and that inflation indicators are high and expected to rise further.

"The MPC minutes, which are published later this month [June 18], should give some more information on how the MPC members judged the risks in what is a highly uncertain economic situation.

"If the slowing in economic activity is viewed as supporting lower inflation in the medium term, a further rate cut could still be on the cards later this year, although much will depend on how inflation develops in the coming months."

And equity strategist at Barclays Stockbrokers Henk Potts also recognised the quandary MPC members faced when making their decision. However, like Mr Naisbitt, he did not rule out future rate cuts. "The MPC finds itself in the middle of a difficult balancing act, involving rising inflation on one side and slowing economic growth on the other," he said.

"There is no doubt that UK economic growth is moderating - the credit crunch has reduced the availability of credit, the housing market is slowing down and the high street is showing signs of softening. Real incomes are also being squeezed by high inflation, which has the potential to further reduce household demand. Meanwhile, inflation is way above target and set to go even higher in the coming months.

"However, as you look into 2009, slowing economic growth should reduce capacity pressures and thus inflation, and therefore there is still the possibility the MPC could cut interest rates later on in the year."

Trevor Williams, chief economist, Lloyds TSB Corporate Markets, commended the MPC announcement. "The worry is that worsening inflation figures in the months ahead could push inflation expectations up even further, making a rise in actual inflation a self fulfilling prophecy," he said. "Cutting base rates in this environment is not a realistic option. So the MPC was right not to move."

Meanwhile, mortgages director at Legal & General, Ben Thompson, is hoping for cuts in the medium term in order to reduce pressure on mortgage holders. He said: “It’s altogether unsurprising to see rates held for now. Many in the industry will have seen previous cuts earlier this year as positive although the painful dynamic is that these cuts have been more that offset by the increase in mortgage pricing.

"The hope is that the lack of confidence which is now feeding into the wider market will pave the way for more rate cuts in the medium term as and when inflationary pressures subside.”

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