Belfast Telegraph

Rates held but likely to increase in near future

The Bank of England has held interest rates at 0.5% and left the scale of quantitative easing unchanged at £200bn.

Members of the Bank's Monetary Policy Committee voted to leave rates untouched at a meeting yesterday.

Angela McGowan, chief economist at Northern Bank said the Bank faced pressure to increase interest rates sooner rather than later to curb inflation, particularly following a rise in VAT to 20%.

"The VAT rise is expected to make inflation hit 4.0% in the spring - one of the highest levels since Bank of England independence in 1997 - and the risk rises further if retailers opt to increase prices by more than the VAT rise implies.

"But since inflation is already high due to high energy prices and the VAT rise - which the Bank of England can't do much about - it is not clear why the response should be a higher policy rate.

"There is speculation that more members will vote for a rate hike within the next couple of months.

"The Wall Street Journal has speculated that two more 'hawks' - those who want to control inflation with interest rate adjustments - will emerge soon.

"Nonetheless those members who prefer low interest rates to stimulate growth - 'doves' - would still be in a clear majority."

Howard Archer, chief economist at IHS Global Insight, said the Bank was unlikely to put rates up before the fourth quarter of 2011, although there was a chance they could go up slightly as soon as next month.

Philip Shaw, chief economist at Investec, estimates CPI could rise as high as 4.5% this year if the full effect of the VAT rise is passed on to consumers rather than absorbed by retailers and other businesses.

Inflation could also stay above target in 2012 if commodity price hikes linger, he added.

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