Bank holds rates at 0.5 per cent

Robyn Hall

May 5, 2011

The announcement came at noon after a two day meeting of the Bank of England Monetary Policy Committee and the MPC once again voted in favour of holding rates.

Inflation was speculated to rise again especially given the recent surge in oil prices and that the rising costs would be passed on to consumers.

After just dodging a double dip recession, economic growth remains relatively weak making it difficult to increase the cost of borrowing: official figures from the Office of National Statistics display a GDP growth of 0.5% between January and March putting the UK outside of a new recession – regarded as two consecutive quarters of negative growth.

At his final MPC meeting, Andrew Sentance, an external member of the MPC of the Bank of England, and his fellow hawks have failed to push through a rise in UK interest rates leaving the cost of borrowing unchanged again on Thursday. This meeting marks Sentance’s last MPC meeting and he’ll be replaced by Ben Braoadbent, a senior economist at Goldman Sachs.

At the start of April, money markets predicted that June would be when the first rise in rates would occur, but this had shifted back to October by the end of April. Money markets now mark December for the first rise in interest rates.

Ben Thompson, managing director, Legal & General Mortgage Club, said: “Mervyn King went on record this week hinting that rising interest rates might overly stress individuals that are carrying too much debt and this was a pretty clear signal that intentions were not to increase.

“Some previous predictions pointed to this month for the first increase – our belief is the earliest possible rise will be in August, but it is likely that we won’t see a change until some time after this as the economic recovery remains very fragile in many parts.

“It is very telling that this exceptionally low 0.5% base rate constitutes “an emergency measure” for the economy, and has now been in place for over two years.”

Alison Beech, business relationship director at Valunation, added: “The Monetary Policy Committee has made the right decision in holding the base rate again this month. This week we have seen that mortgage lending levels are historically low and commentators are suggesting a prolonged period of falling house prices. Increasing the cost of borrowing right now would have a negative impact on personal finances and business spending, and not be conducive to economic recovery.”

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