BOE leave interest rates unchanged at 5.00%
8 May 2008
As expected, the Bank of England elected to keep interest rates on hold at 5.0% in May, in what was thought to have been one of the Bank’s closest calls. In light of huge increases in pipeline inflation and reports of rising prices in many sectors, the MPC have chosen to maintain a gradual approach to monetary easing, avoiding back-to-back rate cuts for fear of de-anchoring inflation expectations.
While consumer price inflation remained steady at 2.5%y/y in March, pipeline inflation continues to pose significant upside risks. Input price inflation reached an all-time high in March of 20.6%y/y, driven largely by fresh rises in crude oil prices. Meanwhile, it is becoming increasingly apparent that UK firms are no longer able to absorb such cost pressures, as output prices rose for a seventh consecutive month in March to 6.2%y/y. However, the MPC will be increasingly mindful of recent developments in UK financial markets and their implications on the housing sector and consumer confidence.
The market will look towards the release of the Bank’s quarterly inflation report next week and minutes from today’s meeting in two weeks time to gauge how serious policymakers regard recent inflationary pressures.