BOE leave interest rates unchanged at 5.00%
10 July 2007
As expected, the Bank of England voted to keep interest rates on hold at 5.0% in July, as it grapples with the dual pressures of soaring inflation and slowing economic growth. These conflicting risks are so finely balanced, with developments over the past month compounding the difficult policy judgement as economic activity slowed and price pressures remain elevated.
Consumer price inflation is currently running at 3.3%y/y, its fastest pace since the Bank of England was made independent in 1997 and considerably above the Bank’s 2.0% target. Moreover, with both input and factory gate prices at record highs coupled with already elevated inflation expectations, there is simply no room for error on the inflation front.
Meanwhile, UK economic activity has taken a notable turn for the worse in recent weeks with the services, manufacturing and construction sectors all falling further into contraction. The more dominant services PMI confirms a broad-based deterioration in UK economic activity, with the annual rate of GDP expected to weaken in the coming quarters especially as the PMI breakdown sees limited scope for a near term recovery.
As always, the market will look towards the release the minutes from today’s meeting in two weeks time to gauge how serious policymakers regard recent inflationary pressures and whether or not there is scope for further monetary easing in the coming months.