Business

UK interest rates held at record low of 0.5%

Bank of England
Image caption There has been no change to the Bank rate since it was lowered to 0.5% in March 2009

UK interest rates have been held again at their record low of 0.5% by the Bank of England's Monetary Policy Committee.

There has now been no change to the Bank rate for two years, despite the fact that inflation is currently twice the Bank's target rate.

But there had been some speculation that rates could change this month after three MPC members voted for a rise in February.

No new quantitative easing measures were unveiled either.

The Bank has faced a dilemma over what to do on interest rates.

Raising rates slows down inflation - and it is the Bank's job to keep inflation in check.

But it also increases the cost of borrowing and there are concerns this may tip the UK back into recession, especially after the shock 0.6% contraction in the economy seen in the last quarter of 2010.

"MPC members continue to have widely divergent expectations about the outlook for inflation, so this decision comes as no surprise," Ian McCafferty, CBI chief economic adviser, said.

"The short-term data continue to cloud the issue, but there are growing risks of inflation becoming more ingrained as firms attempt to bolster their profit margins and employees seek higher wage rises in the face of sharply increased costs of energy and commodities."

Consumer price inflation currently stands at 4%, well above the Bank's target of 2%.

As well as the VAT increase, the rate of inflation has also been pushed up by oil prices, which have risen amid concerns about political unrest in the Middle East and North Africa.

The British Chambers of Commerce (BCC) welcomed the central bank's decision to leave rates on hold but said that ongoing speculation over interest rates could harm business.

"While the MPC cannot forecast its future actions, the way it currently communicates can create uncertainty," said David Kern, chief economist at the BCC.

"The MPC must address this in order to give businesses and market analysts a greater degree of predictability."

The Bank of England's dilemma

Image showing memebers of the Bank of England committee
The Bank of England's interest rate-setters on the Monetary Policy Committee (MPC) had a tough decision to take on 10 March. They had to decide whether to raise rates from the record low of 0.5% where they have stood for the past two years.
Chart illustrating the changes in committee voting patterns over the last 12 months
One member, Andrew Sentance, has been alone in voting for a rate rise for most of the past year. But in the meetings in 2011, others have been joining him, and last month the motion to keep rates unchanged was only carried by six votes to three.
Line chart showing the fluctuation in inflation over the last eleven years
Those voting for an immediate rate rise have been concerned that there is not yet any sign of inflation coming down. Raising rates is supposed to reduce inflation. The MPC's job is to keep inflation measured by the Consumer Prices Index at around 2%.
Chart illustrating the growth of GDP quater on quater for the last 2 years
The majority view in March was that the rate rise should be delayed because the main risk on inflation was that the weak economy could send the rate of inflation well below the 2% target. This fear was stoked by the contraction in the UK economy in the last three months of 2010.
Graphic comparing the relative size of America and Chinas wealth gap
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