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Base rate held for 23rd month

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10/02/2011

The Bank of England has chosen to hold base rate at 0.5%, despite increasing pressure from rising inflation. The Monetary Policy Committee (MPC) has also maintained its quantitative easing asset purchase programme (QE) at £200bn.

However, concern over inflation has led some economists to speculate that the MPC will break the record breaking run of base rate’s historic low by increasing it sooner than previously predicted.

Inflation remains well beyond the MPC’s target of 2% to 3.7%, as commodity prices have soared in recent months. The next inflation report, due on 16 February, will reveal if the figure has been pushed even further.

Nevertheless, there has been no revision of official interest rate predictions, with the CBI stating it expects base rate to move in Q4 2011.

Minutes from last month’s MPC meeting revealed that the members are increasingly split over what move to make, with two members, Andrew Sentance and Martin Weale, voting for interest rates to be hiked 0.25%.

A third, Adam Posen wished to see base rate held and QE increased to £250bn.

Barry Naisbitt, chief economist at Santander UK, said: “The surprise news last month was that two MPC members voted to raise rates. This, combined with concerns that inflation is going to increase further, made the February decision more uncertain than for a long time.

“While the MPC has again voted for no change, it may have been by a narrower margin than last month. We’ll know the voting outcome and the views behind it in a couple of weeks when the minutes are published.”

He added: “Financial markets will turn their attention to the quarterly inflation report and, in particular, the projections for inflation and growth.

“Since the last report, we have had the unexpected 0.5% fall in GDP in the final quarter of last year and the more positive survey readings for January. There will be a considerable focus on how the Bank views these, whether it expects inflation to be higher this year than it did a few months ago, and how it judges the risks in the current economic situation.”

Ray Boulger, senior technical manager at John Charcol, commented: “A Bank rate increase now would have a minimal impact on inflation, but the message it sends to consumers would seriously increase the risk of a double dip recession, which would be politically very embarrassing for the government.

“This suggests that the 0.5% Bank rate will not only reach its second birthday next month, but also notch up several more months before a rate rise is justified.

“With arch hawk, Andrew Sentence, due to retire from the MPC after the May meeting it will be even more interesting than usual to see whether the Chancellor replaces him with someone of the same ilk or someone whose view on interest rates is more in keeping with the Chancellor’s position.”

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