The Bank that likes to say No

The Bank of England has decided to keep interest rates on hold at 5% - for this month at least...

Last Updated: 31 Aug 2010

The decision by the Bank’s Monetary Policy Committee doesn’t exactly come as a massive surprise – it reduced rates from 5.25% last month, and it doesn’t normally like to cut twice in a row. Some of the more gloomy economic stats this week did persuade a few analysts that a further 0.25% cut was necessary – but clearly the committee decided against it.

The MPC was facing its standard dilemma this month. Cutting rates might help to jump-start our flagging economy, but it might also compromise the Bank’s main aim of keeping inflation below 2% – it’s currently hovering dangerously close to the 3% level that will earn Governor Mervyn King a wrist-slapping from Chancellor Alistair Darling. According to the most recent Consumer Prices Index, inflation remained steady at 2.5% in March, but the British Retail Consortium reckons food prices rose 4.7% in April – suggesting that there’s still some work to be done.

The previous voting of the MPC also suggested a further cut was unlikely – two of the nine voted against a cut last month, so it seemed hard to imagine they’ve seen anything to change their mind in the last few weeks. After all, oil has now soared above $120/ barrel, commodity prices (like wheat and grain) have kept rising, and the pound has kept falling. So we’re clearly going to be paying more for our petrol, our weekly shop and our summer holidays in the coming months.

On the other hand nobody seems in any doubt that further rate cuts will eventually be needed. House prices seem to be falling, new mortgage approvals are down, and consumer confidence is in the doldrums – so sooner or later the economic slowdown is going to become a more pressing concern than inflation. Some think we should take a leaf out of the US book and start cutting rates aggressively now (a strategy that even MPC member Prof. David Blanchflower seems to favour).

That said, you’d be forgiven for being fairly indifferent to the Bank’s decision today. After all, it usually impacts us through a change in mortgage rates – and at the moment, the problems in the credit markets are preventing the banks from passing any cuts on to their mortgage customers anyway. So even if the MPC had dropped rates to 4.75%, it probably wouldn’t have made our monthly mortgage bills any smaller – at least not for the time being...

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