MPC set to hold rates as recovery fears grow
Policymakers at the Bank of England gather for the latest interest rates decision this week as Britain faces the twin threat of above-target inflation and a stalling recovery.
Experts believe the Bank will hold interest rates and Quantitative Easing again in August, but Governor Mervyn King recently laid bare the challenges facing its Monetary Policy Committee (MPC).
In a recent appearance in front of MPs on the Treasury Select Committee, the central bank boss warned a sustained recovery was still highly uncertain, despite the recent 1.1% surge in growth during the second quarter.
But he also cautioned inflation would remain high throughout 2010 and most of 2011, signalling more pain for households already under pressure from tough austerity measures.
Despite the inflation woes, his comments sent out a clear message that growth needed to be prioritised for some time yet — and that interest rates would likely remain low for many months.
MPC member Andrew Sentance has made recent calls for a quarter point hike in rates to rein in Consumer Prices Index (CPI) inflation, but is not expected to persuade fellow members to join him.
And while the Committee is set to have the benefit of an early preview of the Bank's upcoming August inflation report, the majority of the MPC will want to wait until the outlook for the UK is clearer, according to Investec Securities economist David Page.
He said: “We acknowledge a large degree of uncertainty at present.
“However, we are hopeful that this will clear towards year-end and maintain our view that the MPC will start to raise Bank Rate in early 2011.”
Mr King told MPs last month there was a “considerable distance to travel” before interest rates — currently at a record low 0.5% — would come back to typical levels.
Signs of slowing growth in key sectors in the UK and across the wider global economy have raised concerns the recovery is on rocky ground.
Experts are worried the Government's austerity measures will stamp out growth, while a stuttering recovery in the US could soon spread to other economies.