MercoPress. South Atlantic News Agency

In spite of slowdown UK interest rate left on hold at 5%

The Bank of England Monetary Policy Committee, MPC, decided Thursday to hold interest rate at 5%. The decision had been widely expected amid concerns about the pace of inflation.

Rising food and fuel prices pushed inflation in the UK to 3% in April, well above the government target of 2%. The MPC has already cut interest rates three times since December 2007 (the last time was in April) in an attempt to help the slowing economy. However, the economic slowdown and falling house prices had led some to call for another cut in rates to boost spending. Many economists feel that the MPC needs to wait and see whether higher food and fuel prices lead to higher wages or lower spending in other areas before changing rates. If inflation rises above 3% then Bank of England governor Mervyn King must write to the chancellor to explain why. At the MPC's last meeting in May, only one of its nine members voted to cut rates. "The Bank had little option this month other than to leave interest rates on hold," said Ian McCafferty, chief economic adviser to the employers' group, the Confederation of British Industry. "Oil and commodity prices are still of great concern and businesses are having to raise prices as profit margins get squeezed further." House prices are falling as the credit crunch makes lenders reluctant to provide mortgages. The latest figures from the biggest mortgage lender, the Halifax, showed a 2.4% fall in house prices during May. This week, the Organisation for Economic Co-operation and Development predicted that UK growth would slow to 1.8% this year and to 1.4% in 2009. It said the global credit crisis, the high costs of commodities such as oil and slowing property markets were all hurting the UK economy. On Wednesday the UK Home Builders Federation called for a half-point cut in interest rates to 4.5%, saying a cut was "imperative" to avoid a severe housing market slowdown. Also on Wednesday, figures from the Chartered Institute for Purchasing and Supply indicated that the UK service sector shrank in May for the first time in five years, as costs rose and confidence in business prospects fell. The British Chambers of Commerce (BCC) said that the MPC should be considering the whole economic outlook and not just inflation. However the British Retail Consortium supported the decision to keep rates unchanged. "Struggling customers and retailers certainly need a boost but, with rising oil and commodity prices stoking inflation to well above the 2% target, leaving rates unchanged was the wise option" said director general Stephen Robertson. The Bank of England's Monetary Policy Committee minutes will be made public on Wednesday 18 June.