Belfast Telegraph

Frozen, but for how long?

Bank of England holds interest rate amid rising speculation

The Bank of England will keep the interest rate at its record low of 0.5% for another month, but speculation continues to mount over an increase in May.

With inflation well over target - recorded at 4.4% in February - and the UK economy beginning to show signs of recovery, experts believe Mervyn King's Monetary Policy Committee will vote to raise the cost of borrowing next month.

Northern Ireland's economists had been united, and correctly, in their predictions of an interest rate freeze.

Dr Esmond Birnie, chief economist at PriceWaterhouseCooper, said the decision was unsurprising, given the unstable state of the UK's recovery.

He said: "That will be welcome in Northern Ireland, where recovery has so far proved especially fragile, with business confidence still negative and unemployment rising more rapidly than elsewhere."

Chief economist at Northern Bank Angela McGowan raised concerns that higher borrowing costs could not be sustained while growth remained weak.

"Price pressures so far have not affected wage formation, so it would be justifiable for the Bank to choose to initiate the rate hike at a later stage," she said.

"Should the Bank adopt this approach, then it is more likely the interest rate hike would come in August."

Tough times were predicted for the Republic after the European Central Bank raised the euro zone interest rate from 1% to 1.25%.

Ulster Bank's lead economist Richard Ramsey said: "Ideally, economies such as Ireland would prefer rates to remain at their historic lows to allow their economies to self-heal.

"However, within a single currency area, like the euro zone, this option is not available and it is a 'one hat fits all' interest rate."

The European Central Bank's key interest rate rise yesterday was its first increase in nearly three years as it signalled its determination to fight inflation even as some euro member countries still struggle with debt crises and high unemployment.

The increase won't by itself hold back growth much. But Europe's increasingly two-speed recovery will be a challenge for the bank as it decides how high rates should go in coming months.