Bank sticks to its guns on inflation as rates held at 0.5%

Another month without any change to the Bank of England's base rate. But it's surely only a matter of time...

by James Taylor
Last Updated: 19 Aug 2013
The Bank of England’s Monetary Policy Committee is holding firm on interest rates, which it has decided to leave at the current record low for the 22nd consecutive month. Apparently, it still holds the view that inflation – which remains well above its target of 2% - will come down of its own accord later in the year, because there’s still not much demand in our feeble economy. But there’s no sign of that happening yet; in fact, with commodity costs on the rise and new year tax hikes also putting upward pressure on prices, some influential voices are already arguing that it’s time to start hiking rates again. They’re likely to get their way before too long.

The minutes of today’s meeting won’t be published for a couple of weeks yet, but judging by last month’s events, there’s already a split emerging about the best approach to rising inflation. On the CPI measure, this jumped to 3.3% in November – and it’s likely that the VAT increase will cause another jump this month. With the World Bank warning today about rising food and commodity prices around the globe, energy prices also inching higher again, and the pound falling in value, you can see why MPC member Andrew Sentance thinks the Bank needs to start hiking rates now, to stop inflation getting out of hand.

However, the Bank’s view apparently remains that rates need to be kept as low as possible, to encourage us to spend our way to recovery. Economists seem to agree, at least for now; the Ernst & Young ITEM Club said today that rate rises could ‘dampen an already fragile economy’. And with unemployment at 2.5m and rising, it is a bit hard to see wages spiralling out of control, pushing up prices. In fact, some commentators even think a rate rise would be counter-productive – the argument being that if the Bank seems to be worried about high inflation, it would entrench expectations of higher inflation, which could put upwards pressure on wages.

So the Bank’s probably right to sit on its hands for the time being. But if the economy starts looking a bit less fragile later in the year, a rate rise will certainly be in the offing. Though at least it might be worth us taking our money out from under our mattresses and putting it back into a bank account then…

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