Inflation threat leaves interest rates on hold
UNCOMFORTABLY high inflation stopped the Bank of England from announcing any more quantitative easing (QE) yesterday, despite the new recession increasing calls for further attempts to stimulate demand.
The Monetary Policy Committee (MPC) held interest rates at 0.5 per cent for the 39th consecutive month, and decided not to increase the size of the asset purchase programme from £325bn.
UK 10-year bond yields rose on the announcement, up 0.072 percentage points to 1.976 per cent as the Bank’s decision reduced demand for the gilts.
In February the Bank forecast inflation would fall sharply to below three per cent by April, leaving price rises within one percentage point of the two per cent target.
However inflation rose to 3.5 per cent in March as factors including energy prices kept rising.
Some economists forecast even more loosening in future months, based on the weak state of the economy which entered a shallow recession in the first quarter of the year, according to official estimates.
“With demand growth disappointing and deteriorating while the sovereign debt crisis is re-intensifying, we had expected the MPC to respond,” said Nomura’s Philip Rush. “We thought the dovish MPC would continue to place inflationary concerns on the back burner.”
Bank governor Sir Mervyn King will step down from his post next June, and markets will watch possible successor Paul Tucker’s MPC vote for hints at future policy moves.