Interest rates on hold for yet another month, but inflation remains a worry


LondonThe Bank of England’s Monetary Policy Committee has decided to leave base rate unchanged at 0.5% for another month.

The decision will hardly come as a surprise, after nearly four years without an increase; however savers, who currently have to contend with huge cuts in interest rates on their savings accounts, will still be left disappointed.

The Bank also decided not to increase the existing £375 billion package of Quantitative Easing (QE). The debate over QE continues to rage with many financial experts questioning the effectiveness of the policy, whilst the OECD (Organisation for Economic Co-Operation and Development) has called for further QE if the economy remains weak.

Balancing act

The Bank is clearly balancing a number of factors, including the on-going weakness in the economy, which shrank by 0.3% over the past quarter, and inflation, which has stayed persistently above the Bank’s 2% target for over three years.

The Bank took the unusual step of issuing a statement at the same time as their decision, which included some worrying news about inflation.

The statement said: “Inflation has remained stubbornly above the 2% target. Despite subdued pay growth, weak productivity has meant no corresponding fall in domestic cost pressures. And increases in university tuition fees and domestic energy bills, largely resulting from administrative decisions rather than market forces, have added to inflation more recently.”

The statement continued: “CPI inflation is likely to rise further in the near term and may remain above the 2% target for the next two years, in part reflecting a persistent inflationary impact both from administered and regulated prices and the recent decline in sterling.

But inflation is expected to fall back to around the target thereafter, as a gradual revival in productivity growth dampens increases in domestic costs and external price pressures fade.”

The news that inflation is set to rise yet further will be greeted with dismay by savers and pensioners, many of whom have bought a level Annuity, which does not rise each year to combat the effects of rising prices.