Bank of England holds interest rates as economic data perks up

Interest rates will stay at 0.5% for another month, as the Bank sensibly continues its wait-and-see policy.

by
Last Updated: 31 Aug 2010

Given the raft of reasonably positive economic data released this morning, it's no surprise that the Bank of England’s Monetary Policy Committee has opted to keep interest rates at 0.5% for another month – or that it’s decided not to extend the quantitative easing programme. But although the Government will inevitably seize on today’s figures (notably the OECD’s suggestion that UK growth will outpace most other rich countries this quarter) as proof that we’re on the path to recovery – just what you want to hear in an Election campaign – the economy continues to look very fragile indeed…

In general terms, the data out today have been relatively positive, pointing to an economy that seems to be on the up. Official figures revealed that industrial output was up twice as much as expected in February, recording a 1% rise – suggesting that January’s 0.5% fall was indeed a weather-related blip. Meanwhile used car sales jumped 27% in March, and house prices nudged up 1.1% (it’s debatable whether that’s good news, but it does provide some indication of confidence). And figures out earlier this week showed that food price inflation fell to a record low last month, easing concerns about the inflationary impact of the Bank’s policies.

Nonetheless, the Bank’s decision to stick rather than twist was widely expected. Interest rates have now been fixed at a record low of 0.5% for 13 consecutive months, while QE has remained at £200bn since November (as economists continue to argue about how well/ whether it’s working). So there was no chance of them doing anything radical one month before a General Election in which they’re supposed to be politically neutral. Besides, there’s a perfectly good economic argument behind it: as the BCC said this week, the recovery remains fragile at best. And much will depend on what happens after the Election: the MPC will want to see if the new Government makes any drastic moves (which could change the picture entirely).

Speaking of the Election, the Treasury will have been delighted by today’s OECD report, which suggests that Britain will grow at an annualised rate of 3.1% in the second quarter - faster than all the G7 except Canada (although the stuff about needing to address our massive budget deficit won’t go down so well). Official figures are due out on April 23, which would be a timely pre-Election boost for Labour. Although since we fell further than most of the G7, arguably a faster pace of recovery is no more than you’d expect.


In today's bulletin:
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BA seals Iberia tie-up - as Unite returns to negotiating table
Rose goes out with a bang as M&S beats forecasts with 5% hike
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