No one expected the Bank of England’s Monetary Policy Committee to change interest rates today, or indeed increase the size of the existing £375 billion program of Quantitative Easing (QE), and we were not surprised when no changes were announced this lunchtime.
Interest rates on hold
The Bank has left base rate at 0.5% since March 2009 and despite the UK officially coming out of recession between July and September there are no signs that interest rates will be changed in the short term.
Indeed the MPC are likely to be concerned by a number of negative economic indicators, including the Office of Budgetary Responsibility (OBR) revising growth downward for 2012 to -0.1% and falling retail sales.
The decision not to increase the existing program of QE could in part be due to the rate of inflation rising more steeply last month than was expected.
The Consumer Prices Index (CPI) rose to 2.7% last month, with the 0.5% increase being significantly higher than most economists predicted.
Many economists believe that introducing more money into the economy, through QE, will cause inflation to rise steeply, causing even more financial hardship to people on fixed incomes or whose wages are rising more slowly than inflation. The Bank would also come under more pressure to increase interest rates if inflation did start to rise dramatically, something they have avoided doing for nearly four years.