Bank refuses to buckle

The Bank of England has decided to hold interest rates at 5% for another month - for what it's worth...

by
Last Updated: 31 Aug 2010

Despite some pressure from the City for a cut – and increasingly frequent media references to the dreaded ‘r’ word – the Bank’s Monetary Policy Committee has decided to stick to its guns and keep rates at 5% for the third month running. With Governor Mervyn King predicting a pile of letters of explanation to Alistair Darling, as inflation continues to run well ahead of the Bank’s Treasury-imposed 2% target, any other outcome seemed pretty unlikely. And there’s an argument that it wouldn’t have made much difference anyway…

It’s been a pretty grim week for economic news. With the housing market in freefall (Halifax said today that house prices were down 2% year-on-year in June), housebuilders in particular are struggling – this morning Barratt Homes announced another 1,200 job cuts, following similar cuts at Taylor Wimpey, Persimmon, Redrow and Bovis (in fact, unemployment now seems to be creeping up across the board). Earlier this week the British Chamber of Commerce reported that business confidence, particularly among SMEs, was at an all-time low - leaving us at ‘serious risk of recession’.

So in an ideal world, this would have been an opportune moment for the Bank to cut interest rates and attempt to kick-start our flagging economy. But with food and fuel prices continuing to soar – today we learned that food prices in June were 7% up on the same month last year, as retailers passed on rising costs to customers – the danger of soaring inflation shows no sign of abating. Clearly the Bank has decided that cutting rates now might make this situation even worse.

For mortgage holders, today’s announcement will probably make no difference either way – because it’s become so much more expensive for banks to borrow money, mortgage rates are still running way ahead of the interest rate anyway. And it’s possible that the Bank couldn’t have done anything that would have made much difference to the country as a whole – interest rates are, after all, a pretty blunt instrument for controlling the economy these days.

A rate cut will presumably happen at some point – but in the meantime, at least the decision to stick at 5% might stop the pound from sliding even further against the euro for a while. Assuming you haven’t already cancelled your summer holiday this year, it might be a small crumb of consolation that you’ll be able to afford a bit more vin rouge...

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