Business leaders welcome Base Rate decision

Nia Williams

June 9, 2011

The MPC also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion.

The committee did not reveal any new quantitative easing measures.

The last change in Bank Rate was a reduction of from 1.0% to 0.5% on 5 March 2009.

The decision to hold the rate was widely expected as many believed that the economy is too fragile for an increase in rates to be appropriate.

This week’s price hikes by Scottish power confirmed the Governor of the Bank of England, Mervyn King’s prediction last month that utility prices would rise. Despite the increase in inflationary pressures, the MPC has held their stance to not raise rates to tackle inflation.

Business leaders have welcomed the bank’s stance and warned a rate hike would throw the economic recovery off course.

David Kern, chief economist at the British Chambers of Commerce, said: “While increased utility prices and high inflation puts the MPC in an uncomfortable situation, countering this with a rise in interest rates would be a mistake. As long as wage increases remain subdued, the MPC should hold its nerve for the time being.”

Nick Hopkinson, director of PPR Estates, added: “The Bank of England is clearly not going to be able to increase interest rates this year, even though inflation is running away from it. UK PLC is still very weak and any increase in borrowing costs would almost certainly tip the scales back into recession.

“Whilst keeping interest rates artificially low may be the easiest way of ‘salting away’ the huge national debts it is terrible news for savers and no real comfort for many thousands of struggling borrowers whose debt interest costs are typically circa-5% plus anyway these days. Ironically, it’s only high earners with huge deposits who don’t really need the money who can borrow competitively at the moment.

“The Government’s austerity cuts continue to bite, unemployment continues to move upwards and household incomes and cashflows will continue to come under increasing pressure for the remainder of 2011. The house sale market has virtually ground to a halt this spring with transaction volumes falling back to the lowest levels seen since the credit crunch outside London recently.

“I therefore expect house prices to fall by 5% this year, even if base lending rates remain artificially low. If interest rates are forced up due to the MPC needing to retain credibility on its inflation management brief, then things will get a lot worse for many struggling sellers.”

Ben Thompson, managing director of Legal & General Mortgage Club, said: “The gap between bank rate and inflation may be widening but there are precious few other indicators that provide a rationale for increasing BBR from its current rock bottom levels.

“The Bank remains in the thick of it; on the one hand needing to ensure that a sustainable economic recovery is baked in, on the other hand ensuring it does not lose its credibility as an independent rate setter that is capable of maintaining a controlled and low inflation economy.

“It’s a tough one that, but the recovery has to come first.”

Sign up to our daily email