BOE leave interest rates unchanged at 5.00%
4 September 2008
As expected, the Bank of England elected to leave interest rates on hold at 5.0% today for the fifth consecutive month, but expectations are rising that a darkening economic outlook will force it to cut rates later this year.
The BoE Quarterly Inflation Report signalled that further monetary policy easing lay ahead, but the timing of which would depend on inflation expectations going forward. However, given that consumer price inflation shot up to 4.4%y/y in July, more than twice the Central Bank’s 2.0% inflation target, the MPC have little room for manoeuvre for the time being. Moreover, the inflation rate is forecast to rise further in the months ahead, due to elevated pipeline inflationary pressures and planned hikes of more than 30% in household utility costs.
However, the Central Bank’s last meeting’s projection for “broadly flat” growth already looks set for another downward shift. Britain’s economy unexpectedly ground to a halt in the second quarter, its weakest performance since the recession of the early 1990’s. Furthermore, Britain’s ailing housing market has shown little sign of recovery, as consumer confidence crumbles and retailers and construction companies take the hit.
Given the increasing divide amongst the Monetary Policy Committee, market attention now shifts to the BoE minutes released in two weeks time to gauge the timing of further policy easing.