The Bank of England’s policy setting committee has voted to hold interest rates at their current level of 0.5 per cent and to maintain its gilts purchase strategy, known as quantitative easing, at £200bn, as was widely expected.
The monetary policy committee has been presented with a variety of indicators that make it far from clear that Britain’s economy is in recovery mode. While a survey of purchasing managers in the services sector was far more buoyant than had been expected – particularly critical because it is the economy’s largest sector – an official reading of industrial output unexpectedly fell in February.
That reading may have reflected oil production taken out of service for maintenance but manufacturing, which accounts for 80 per cent of the output index and has been the economy’s star performer recently, was flat.
Moreover, a respected independent think-tank, the National Institute for Economic and Social Research, has estimated that gross domestic product growth in the first quarter of this year was only 0.7 per cent. After the 0.5 per cent contraction in output at the end of 2010, it would appear that Britain’s economy has been little better than stagnant over the past six months.
Meanwhile, there are signals from a variety of consumer-facing businesses that households are feeling the pinch of stagnating incomes, rising taxes and rising prices. A slowdown in consumer spending is likely to weigh heavily on demand.
Some members of the MPC have said they would like to see official confirmation of growth in the first quarter before moving to raise rates.
Commenting on the decision, Howard Archer of Global Insight said MPC members opted for caution in the light of “mounting evidence that consumers are reining in their spending, the fact that substantial fiscal tightening kicked in from early-April and the threat to growth currently coming from high oil prices”.
The CBI’s Ian McCafferty agreed that rising inflation, additional cost pressures in the pipeline, and questions over the underlying pace of growth left the Bank’s policymakers “in an unenviable position”.
“Not surprisingly, they’ve elected to wait until things become a little clearer before setting their course towards any rises,” he added.
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