Bank warns of risks on the downside

David Hellier
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PROSPECTS for the UK’s economic recovery remain uncertain, the Bank of England’s Monetary Policy Committee concluded in minutes released yesterday from its latest meeting.

The Committee, which voted unanimously to leave interest rates unchanged at 0.5 per cent, was meeting just after voting in the general election.

The minutes reveal the Committee’s concerns about turbulence in the Eurozone area and at home there were further concerns that the recovery could be impeded by the need for substantial fiscal tightening; the need for further strengthening in the balance sheet of the UK banking sector; and the desire of the private sector to save more in an environment of increased uncertainty.

The Committee said it judged that the recovery in economic activity was “likely to gather strength over the next year or so.” But, it added, “the downside risks to growth in the near term had increased somewhat, reflecting the heightened market concerns about the prospects for fiscal consolidation in a number of Eurozone countries.

The minutes helped confirm the view of many analysts that rates would remain at their current level until at least 2011.

Howard Archer of IHS Global Insight said: “For now at least, we are retaining our view that the MPC will keep interest rates down at 0.50 per cent into 2011.

“This reflects our belief that recovery will be bumpy and gradual over the coming months. However, we acknowledge that there is a very real chance of at least a token interest rate hike before the end of the year if inflation continues to provide upside surprises over the coming months.”

The Committee concluded that, despite it currently overshooting its target level, inflation was more likely to be below target than above it for much of the forecast period, although it says that “the risks are broadly balanced by the end.”

The vote at the end of the two-day meeting took place after the general election but before the Lib-Con coalition government was formed.