Interest rates held at record low


Rising inflation is being fuelled by the rising cost of food, clothes and oil

The Bank of England has left interest rates at their record low despite fears over surging inflation and commodity prices.

Policymakers kept the base rate at 0.5% for the 22nd month in a row even though consumer price index (CPI) inflation hit 3.3% in November, driven by the rising cost of food, clothes and oil.

The Bank also maintained money-boosting efforts under the quantitative easing programme at £200 billion.

The Bank’s policy setters, who are tasked with keeping CPI at 2%, have admitted that inflation could rise to 4% in the spring but said the rise would be temporary and fall back next year.

The feeble nature of the economic recovery means the Bank would rather brave above-target inflation than risk tipping the economy into a “double-dip recession”. Putting up interest rates might help reduce inflation but it would also restrict the spending power of homeowners with tracker mortgages and people repaying other debts, which would further endanger the recovery.

Consumers’ spending power is being squeezed because pay packets are not keeping up with inflation. There has been a barrage of bad news for cash-strapped consumers in recent weeks as petrol, gas and clothes all rose in price, and last week’s VAT rise from 17.5% to 20% pushed up the cost of most goods and services.

Monetary policy committee (MPC) member Andrew Sentance has repeatedly called for gradual interest rate rises to stave off the rising threat of inflation. But the consensus of the committee is that most of the inflationary pressures should fall away in a year’s time.

And there are concerns over the strength of the recovery, which weakened in December, hindered by the Arctic weather.

Markit/CIPS data showed that the construction sector fell further into decline in the month, while the powerhouse services sector contracted marginally for the first time in 20 months, leaving only the manufacturing sector in growth.

GDP figures for the second and third quarters were also revised down from 1.2% to 1.1% and from 0.8% to 0.7% respectively, adding to fears over the strength of the recovery.

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