Interest rate update

This entry was posted on 28 September

As policymakers continue to try to reconcile their concerns about the health of the UK economic recovery with their worries about inflation, UK interest rates have remained unchanged at their all-time low of 0.5% since March 2009. However, the nine members of the Bank of England’s (BoE’s) Monetary Policy Committee (MPC) voted unanimously for the first time since May 2010 to hold interest rates at their August meeting. The Organisation for Economic Co-operation & Development (OECD) urged the BoE to support economic activity by retaining its “expansionary” stance in the short term, but warned that interest rates might have to rise this year to combat inflationary pressures.

The UK economy expanded by only 0.2% during the second quarter and output in the manufacturing sector fell, fuelling fears that the recovery might be stalling. The OECD expects UK economic growth to remain weak during 2011, hampered by high inflation and the government’s measures to eliminate the budget deficit.

Minutes from the MPC’s meeting indicated that several members want to consider a further programme of asset purchases to support the economy. Although the MPC concluded that such action was not yet necessary, one member continued to vote for additional quantitative easing (QE) measures. Elsewhere, the Institute of Directors called for further QE to stave off the risk of a double-dip recession. Inflation remains a significant problem for policymakers; prices rose at an annualised rate of 4.5% during August, compared with an increase of 4.4% during July. The BoE has tipped inflation to reach 5% this year before subsiding during 2012 and into 2013.

The contents of this article should not be construed as advice and do not necessarily reflect our views. Independent Financial Advice should always be attained in order to assess your own individual circumstances.