Bank keeps rates on hold again

June 9, 2011

The Bank of England has kept interest rates at their record low following a flurry of recent data showing the fragile nature of the UK's economic recovery,

Rates have been pegged at 0.5% for 27 consecutive months despite spiraling inflation. The move will be welcomed by homeowners and small businesses.

The Bank's rate-setting Monetary Policy Committee (MPC) has an inflation target of 2% but the it rose to 4.5% in April's and most analysts expect it to hit 5% by the end of this year.

Economists say MPC members have to tread a fine line between keeping rates on hold to try to spur economic recovery, or raising them to ease inflation.

Hetal Mehta UK Economist at Daiwa Capital Markets Europe Ltd, told Reuters: "The past few weeks have seen a raft of disappointing data pointing to a subdued economy, and markets have significantly pushed back their expectations for the first interest rate hike well into next year, which seems to us entirely rational."

But James Knightley, economist at ING, believes a rate rise is likely this year.

"With inflation likely to move above 5% in the next three to four months on the back of rising utility bills and food prices and with employment and employment intentions surveys remaining firm, we feel that the balance of probabilities favours an earlier move," he said.

Clive Hetherington, area director – South West at Lloyds Bank Corporate Markets, said: “For some time, our central view has been that UK bank rates will be left unchanged until the last quarter of the year, mainly because the headwinds facing the UK economy remain significant.

“That said, we think the fall in market interest rate expectations has gone too far with prevailing market rates underestimating the risk of a more pronounced rise in interest rates over the medium term.  Although official interest rates are expected to rise only gradually, the eventual turn in the rate cycle and the heightened inflation risk leave swap rates vulnerable to a significant move higher over the medium term. Companies must ensure they are equipped to manage that risk and have balance sheets able to withstand a normalising of UK interest rates.”


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