MPC poised to keep interest rates on hold

THE Bank of England’s Monetary Policy Committee (MPC) is expected to hold interest rates at 0.5 per cent when it meets later this week, as fears of a slowdown intensify following weaker-than-expected surveys.

Data published last week showed further falls in house prices and a marked slowdown in economic activity across the manufacturing, construction and services sectors, even before the government’s fiscal tightening measures kick in.

“In light of this, we believe that when the Bank of England’s MPC meet next week, the precarious nature of the recovery will ensure that a loose monetary stance is maintained,” said Hetal Mehta, UK economist at Daiwa Capital Markets.

Citi’s Michael Saunders also points out: “There are signs of a third quarter GDP slowdown, but the Inflation Report already anticipated a substantial slowdown and possible downward revision to second quarter growth.”

The additional fiscal burden expected in the UK and the fact that the private sector continues to deleverage, suggests that the Bank of England is likely to follow suit and keep rates low.

Consequently, City economists think it unlikely that any other MPC members will have joined hawk Andrew Sentance in calling for a rate rise of 25 basis points. Persistent high inflation has been plaguing the MPC since the start of 2010 and, with a VAT hike looming, economists expect it to remain high well into 2011.

● The MPC has kept interest rates on hold at 0.5 per cent for 17 months so far, the longest period of stability since 1940-1950.

● Interest rates are at their lowest level since the Bank was established in 1694.