Interest rates held after latest gloomy economic forecast

The Bank continues its wait-and-see policy, while the Treasury waits to see its share of the Eu80bn Portugal bailout bill...

by James Taylor
Last Updated: 19 Aug 2013
The big economic news this morning has been Portugal's long-awaited request for a bail-out; caretaker PM Jose Socrates says borrowing costs have got so high that the country basically has no other option. It's not clear yet how big the bailout will have to be, or how much the UK will have to stump up - though some reckon it could be as much as €5bn. That's going to go down like a lead balloon, given that a) Britain's not even part of the eurozone and b) we've got enough problems of our own at the moment. An influential think-tank suggested today that the UK's recovery had pretty much run out of steam – which helps to explain why the Bank of England's Monetary Policy Committee has just decided to hold interest rates at 0.5% for another month...

Today's decision by the MPC - which was widely expected - means rates have now been held at this record low for 25 months. The Bank's getting more and more flak about its inability to get inflation anywhere near its 2% target. But as long as the economy remains in its current feeble state, Mervyn King and co are unlikely to change tack. The King view - which a majority (though not all) of the MPC seem to share - is that a rate rise may tip the UK economy back into recession, because it'll push up the cost of borrowing and mortgage repayments, thus putting an even tighter squeeze on our dwindling incomes.

And there's certainly no sign of the economy powering back, if the latest figures from the National Institute of Economic and Social Research are anything to go by. Although it reckons the UK saw growth of about 0.7% in the first quarter, it thinks most of this was just a rebound after the pre-Christmas snow disruption; if you look at the last six months as a whole, we've seen growth of just 0.1%, it says. Which, to all intents and purposes, basically means the economy has gone sideways for half a year. Sadly, this doesn't come as a huge surprise - particularly after yesterday's disappointing figures on manufacturing and industrial output (flat and 1.2% down respectively).

Still, there's always someone worse off. Look at Portugal: its borrowing costs have reached such unsustainable levels that it's having to go cap-in-hand to the EU, possibly for as much as €80bn. The UK's share of that will depend on which mechanism Portugal ends up tapping; although we're obviously not part of the eurozone bailout fund, we do contribute to the EU rescue fund, and the IMF's similar scheme. Some analysts reckon our eventual share could be as much as €5bn, which is going to be politically embarrassing for the Government - particularly as there's nothing to suggest that its own economic remedial measures here in the UK are having the desired effect yet...

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