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Interest rate increase not likely in the near future

Expectations of an increase in the official interest rate, or Bank Rate, from its 0.50 per cent level were pushed back last week.

The minutes from the Bank of England’s Monetary Policy Committee meeting in July, published on 20 July, showed the risks that economic activity would remain subdued through the rest of 2011 had increased.

The minutes said: “Expectations implied by market prices of the point at which Bank Rate would begin to rise had been pushed back further during the month, partly because economic data, both at home and overseas, had been softer than anticipated.”

The current balance of risks to the economy and of rising inflation led the majority of committee members to conclude that ‘recent developments had reduced the likelihood that a tightening in policy would be warranted in the near term.’

Weak economy

A variety of factors have adjusted the position of the MPC slightly, pointing to the fragility of the recovery in the UK. This includes ongoing restrictions on the supply of credit to businesses and weaker consumer spending.

In an interview with the Financial Times on 25 July 2011, Vince Cable said there wasn’t a ‘strong recovery’ in the UK at the moment, suggesting the Bank of England could consider further quantitative easing.

Quantitative easing was a programme of asset purchases the Bank began in 2009. The measure designed to boost the financial system has remained at the £200billion level since the end of 2009. One member of the MPC is calling for this to be increased to £250billion.

Inflation

The MPC minutes said price increases such as rising electricity and gas bills were likely to push the Consumer Prices Index (CPI) measure of inflation to five per cent ‘in the coming months’.

“In the light of recent developments in utility and food prices, the peak in inflation was likely to be a little higher and come sooner than the Committee had previously expected,” the minutes said.

Despite this the Committee broadly expects this spike in inflation to be temporary and over the longer term, into 2012, inflation will fall back due to the fact the economy is not running at full capacity.

One concern about inflation above the two per cent target is that it will become embedded in wages and prices. However, the MPC has seen no evidence yet of wages spiralling upwards.

“There appeared to be a significant degree of slack in the labour market and that was likely to bear down on earnings growth for some time.”

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