Interest rates unchanged
The Bank of England has held interest rates at 3.5% for a second consecutive month.
The decision by the Bank’s Monetary Policy Committee was widely expected by analysts who believed it would not want to stoke consumer demand further by cutting interest rates.
David Frost, Director General of the British Chambers of Commerce (BCC) welcomed the MPC’s decision.
Mr Frost commented: ‘This decision is acceptable to business at the present moment. The record low interest rates we’ve seen lately have been a boost to business at a very uncertain time. We are reassured by the fact that the Monetary Policy Committee voted unanimously at its last meeting to hold rates unchanged. We urge the MPC to keep the interests of business at the heart of its deliberations in the coming months: inflation is under control and there is scope to keep rates at their record low level for some time to come.’
The Confederation of British Industry claimed that business would not be surprised by the Bank’s decision given how the economy seems to have ‘shrugged off some of the sluggishness that has dominated this year’.
However, Ian McCafferty, CBI chief economic adviser stated, ‘But the Bank should be under no illusions about the continued fragility of the economy. This is going to be a long haul and it will take time before we can be confident of a sustained and balanced recovery.’
The hold in rates was expected due to fears that consumer spending, and especially rising debt levels, would be further encouraged by a cut.
Liberal Democrat Shadow Chancellor, Matthew Taylor called on the Government to help redress the imbalances in the UK’s economy rather than leaving it up to interest rates.
Mr Taylor stated, ‘The Bank is torn between tackling runaway consumer debt on one hand and sluggish business investment on the other. Interest rates alone cannot rebalance the economy. The Government must start slashing through Gordon Brown’s red tape and tax complications that hold business back. Britain can’t borrow its way out of trouble forever.’
The manufacturing sector which has been in the doldrums for nearly two years has shown signs of a modest recovery over the last two months, whilst the service sector has recently grown at its fastest pace for two and a half years.
However, the retail sector suffered a minor slowdown over August as shoppers were put off by the recent heatwave – although retail figures from the CBI suggest that the slowdown is just a blip as retailers expect shoppers to return in September.
Low interest rates have maintained consumer spending at levels that have sustained the UK’s economy, but at the expense of increasing consumer debts.
Figures from the Bank of England earlier this week showed that mortgage lending had increased by 15% over the last three months. Consumers are releasing the extra equity in their homes which has been caused by the rapidly growing housing market.
However, concerns are growing that an increase in interest rates and increasing unemployment would make many people’s borrowing levels unaffordable.
Most analysts believe that the next move in interest rates will be up, but the CBI warned the MPC not to raise rates too quickly to avoid choking off early signs of a recovery before it has had time to gain sufficient momentum.
