No change expected for Bank rate as MPC sits on the fence

09 July 2008 / by Rebecca Sargent
As the UK battles against a looming recession due to the attack of the credit crunch, the Bank of England's Monetary Policy Committee faces one of Britain's toughest challenges.

The wrong decision could cause inflation to cripple consumers or the economy to grind to a halt, so the pressure is on for the MPC to get it right. Consequently, experts are predicting the base rate will remain at 5 per cent for July.

A Reuters survey of 72 analysts revealed a unanimous forecast that the base rate will remain the same. In addition, policymakers have been reported as claiming the decision has never been so hard.

The UK is, according to the British Chambers of Commerce (BCC), dangerously close to recession and a rate cut could accelerate this. However, on the other hand, inflation is already 1.3 per cent over the Bank of England's target rate of 2 per cent, and a rate rise could send this soaring.

At the last meeting, policymaker David Blanchflower voted to cut borrowing rates by a quarter-point, arguing that the risks to growth are greater than that of inflation. However, the European Central Bank has reportedly done the opposite and lifted borrowing costs in attempts to rein in soaring prices.

And, although the MPC is widely predicted to keep the base rate the same tomorrow, it is thought by experts that they may eventually follow the European Central Bank's example.

The decision is set to be a tough balancing act, which is why so many analysts believe the MPC will not yet be confident enough to take action.

The housing market is leading the UK in its march towards recession as mortgages slump because lenders stop lending and start charging excessive arrangement fees.

In addition, the house-building industry is suffering blows as key players cut jobs. Even recreation and entertainment industries are suffering as Marks & Spencer issues a profit warning and the BBC also claims to be affected.

Consequently the battle between inflation and the economy struggles on, and unless the MPC make a shock decision tomorrow the balancing act will continue.

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