Bank of England Holds Rates Despite Inflation Jitters

LONDON: The Bank of England held British interest rates at a record low on Thursday in the face of a fragile economic recovery despite mounting concern that inflation could soon shoot above 5.0 percent.

The central bank said its nine-member monetary policy committee (MPC) voted to maintain borrowing costs at 0.50 percent at its regular monthly meeting.

Some economists predict that the BoE will soon be forced to raise rates in order to dampen inflation – which has been driven by resurgent commodity and fuel prices, as well as a recent government sales tax hike.

Inflation jumped to 3.7 percent in December, with January data due next week. The BoE’s main task is to use interest rates to keep the annual inflation rate close to 2.0 percent – and thereby preserve the value of money.

“Today’s decision looks more like a stay of execution than a reprieve,” said chief economist Andrew Smith at accountancy group KPMG.

“With the fall in fourth-quarter GDP looking increasingly like a blip, and inflation set to rise further above target in the next few months, the case for a rate rise is strengthening.”

He added: “The MPC has made its decision for now but will face the same dilemma again next month.”

BoE policymakers also opted against changing the BoE’s stimulus programme, under which it has already pumped ?00 billion (235 billion euros, $322 billion) into the economy.

The announcements were in line with market expectations. Minutes from the meeting will be published on February 23 and analysts said they expected these to reveal a closer vote than recently.

“Given the difficult inflation environment we suspect there was a considerable debate at the meeting over whether or not to raise rates,” economist Philip Shaw at financial group Investec said.

“Indeed, one or two members may have switched camps and joined (policymakers Andrew) Sentance and (Martin) Weale, who both voted for a hike last month.

“The MPC will have been given a provisional estimate of next week’s CPI (annual inflation figure for January) … and this will certainly have put the pressure on the committee to consider a hike.”

The bank is also wary about Britain’s fragile recovery from a recession that ended in the final quarter of 2009.

British gross domestic product (GDP) surprisingly shrank 0.5 percent in the three months to December, the first drop in economic output since the third quarter of 2009.

The figure has stoked fears that Britain could be heading for a fresh recession as deep spending cuts introduced by the Conservative-Liberal Democrat coalition bite.

BoE governor Mervyn King warned in a recent speech that the current “period of uncomfortably high inflation,” rather than the weak GDP data, was a more immediate concern.

He told Britons to expect annual inflation to rise to between four and five percent in the coming months due to higher food and fuel prices.

The BoE slashed interest rates to 0.50 percent almost two years ago, in March 2009, when it also launched a radical quantitative easing programme to help drag Britain out of a deep recession.

Under QE, the bank has created some ?00 billion of new money by purchasing government bonds and high-quality private sector assets in an effort to boost lending and support the economy.

Source – AFP/de

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