Bank faces tough choices

07 April 2004
The Bank of England's monetary policy committee is currently facing a difficult decision over whether to raise interest rates tomorrow.

It is widely believed that the committee will raise rates by a quarter of a per cent. This would be bad news for many mortgage holders - but good news for savers.

However, the decision is far from straightforward.

Derek Scott, economic adviser at KPMG, explained: "The Bank of England has a difficult judgement to make on Thursday: it wants higher interest rates to curb housing-led consumer spending, but it doesn't want a stronger pound."

"It's a difficult circle to square at the moment, but in the end it is most likely to be achieved if the housing market really is forced to take a breath. This argues for a sharper rise than the 25bp [0.25 per cent] being predicted for Thursday, though the smaller rise is probably the most likely outcome."

UK manufacturing output was down in February, experts think this might reduce the chance of a rate rise. But heavy mortgage lending, consumer debt, and rising house prices point to a rate rise.

Mr Scott added that: "A bigger rise [than 0.25 per cent] would not be without its risks, but it would be less of a victory for the "hawks" on the MPC than for those who think a correction to the housing market - sooner rather than later - will inflict less pain.

"Slowing down the housing market without pushing sterling higher will not get any easier however, with the ECB [European Central Bank] on the verge of cutting rates to rescue its moribund economies."