MercoPress. South Atlantic News Agency

Bank of England priority list has recovery before inflation: rates unchanged

Dilemma for the Bank when inflation is steaming at double its 2% target

The Bank of England’s Monetary Policy Committee (MPC) has decided to retain the United Kingdom’s interest rate at 0.5%. The rate, the lowest in the Bank of England’s history, has now been unchanged for over two years despite speculation that higher rates may help combat inflation.

In addition, the MPC has kept the asset purchase programme, effectively printing money, unchanged at £200bn.

The Bank of England faces a substantial policy dilemma in setting rates, as inflation is consistently and significantly above the 2% target but growth remains sluggish. Higher rates may help lower inflation, but at the same time will hit growth and risk the tentative recovery.

Last month MPC member Charles Bean forecasted that inflation would fall back in 2012, suggesting that whilst this year may see inflationary difficulties these could fade next year.

An April 5 report showed the UK services expanded the fastest in more than a year in March but the Statistics office also revealed that manufacturing growth stalled in February while accelerating inflation (4.4%) is squeezing consumer spending.

The British Chambers of Commerce this week said that first quarter growth was probably between 0.6% and 0.7%, weaker than expected.

The previous change in bank rate was a reduction of 0.5 percentage points to 0.5% on 5 March 2009. A program of asset purchases financed by the issuance of central bank reserves was initiated on 5 March 2009. The most recent change in the size of that programme was an increase of £25 billion to a total of £200 billion on 5 November 2009.

“The Bank will continue to offer to purchase high-quality private sector assets on behalf of the Treasury, financed by the issue of Treasury bills in line with the arrangements announced on 29 January 2009”, said the official release.

The minutes of the meeting will be published on Wednesday 20 April.

At the Bank of England’s March meeting, Andrew Sentence called for a 50 basis-point increase, while Martin Weale and Spencer Dale voted for a 25-basis-point move. Adam Posen maintained his call to expand stimulus with more bond purchases, according to the minutes of the March meeting.