Interest rate update

This entry was posted on 11 October

As policymakers try to reconcile their concerns about the health of the UK economic recovery with their worries about inflation, UK interest rates have remained unchanged at their all-time low of 0.5% since March 2009. However, the nine members of the Bank of England’s (BoE’s) Monetary Policy Committee (MPC) voted unanimously for the first time since May 2010 to hold interest rates at their August meeting.

The Organisation for Economic Co-operation & Development (OECD) urged the BoE to support economic activity by retaining its “expansionary” stance in the short term, but warned that interest rates may have to rise this year due to inflationary pressures. The UK economy expanded by only 0.2% during the second quarter and output in the manufacturing sector fell, fuelling fears that the recovery might be stalling. The OECD expects UK economic growth to remain weak during 2011.

In the minutes from the MPC’s meeting several members wanted to consider a further programme of asset purchases. Although the MPC concluded that such action was not yet necessary, one member voted again for additional quantitative easing (QE). Elsewhere, the Institute of Directors called for QE to stave off the risk of a double-dip recession. Inflation remains a significant problem for policymakers; prices rose at an annualised rate of 4.5% during August, compared with an increase of 4.4% during July. The BoE has tipped inflation to reach 5% this year before subsiding during 2012 and into 2013.

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