Bank Keeps Rates On Hold

 

November 21, 2007

Last week’s decision by the Bank of England to hold interest rates at 5.75% spared homeowners another bout of misery. It is the second month running that the Bank has decided to leave the rate unchanged from the level it was raised to in July.

However, the Monetary Policy Committee (MPC) took the very unusual move of issuing a statement with its decision. (This has only happened on two previous occasions since the Bank gained independent decision-making from the government and these were at times of global financial crises.)

The MPC said that pay pressure was ‘muted’ and that there were ‘tentative signs of a slowing in consumer spending’ as reflected in falling sales on the high street and a housing market that appears to have cooled a little. The statement did, however, add: “The recent solid pace of output growth has been sustained and the margin of spare capacity appears limited. Indicators of pricing pressure remain somewhat elevated.”

Experts saw this as a sign that the MPC is still leaving itself the opportunity of raising interest rates to 6% in spite of the recent turbulence on the stock market. Other experts feel that the rate has peaked and the next move by the Bank could be a rate cut.

The MPC statement came last week, a day after the Bank has agreed to inject emergency funds into the money markets should borrowing conditions between banks not start to improve. Critics felt that the move actually did little to address the reduced liquidity in the markets.

The statement also said that the MPC had discussed the disruption caused by the credit crunch following the sub-prime mortgages crisis in the US. It did, however, re-iterate its mandate to meet the government’s inflation target of 2%, and not to rescue the markets.

“So the committee discussed these developments and other economic data in terms of their implications for the outlook for inflation,” the statement said. “The committee judged that no change in Bank rate was necessary at this meeting to keep inflation on track to meet the target in the medium term.”

It was, said the Bank, too soon to tell whether the turmoil on the financial markets would have an impact on the wider economy.

Meanwhile the European Central Bank left interest rates unchanged at 4%. This was after ECB president Jean-Claude Trichet suggested last month that to keep better control of inflation rates would rise to 4.25%. He was forced to stay his hand following the uncertainty on financial markets, so the rate has been left as it was. The decision by the ECB’s to leave the rate alone came just hours after it injected more than €42bn (£28.4bn) to ease tension in the lending markets. A bidding war by the banks began straight away as it allocated the funds at between 4.06% interest and 4.13% - well below the overnight lending rate of 4.588%.

In the US the Federal Reserve is under pressure to cut interest rates. Fears are rife that interest rates at their current level will cause an economic slowdown in the US. If it happens there, it is likely to follow in Europe and the UK.

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