Bank of England holds record low interest rates

January 13, 2011

, LONDON, Jan 13, 2011 – The Bank of England on Thursday left its key interest rate at a record low 0.50 percent for a 22nd month running, despite concerns over high inflation and as Britain faces tough economic times in 2011.

The central bank\’s monetary policy committee also refrained from altering its stimulus programme, under which the BoE has already pumped £200 billion (238 billion euros, $315 billion) into the economy since 2009.

Meanwhile Thursday, the European Central Bank froze its key lending rate at a record low of 1.0 percent for a 20th consecutive month.

The BoE announcements were in line with market expectations, while detailed reasons will be available when minutes from the two-day meeting are published on January 26.

"The Bank of England\’s Monetary Policy Committee today voted to maintain the official bank rate paid on commercial bank reserves at 0.50 percent," the BoE said in a brief statement.

"The committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion."

The bank had been widely forecast to keep the status quo amid question marks over Britain\’s tentative fragile recovery, painful cuts in public spending, rising taxation — and above-target inflation.

The bank\’s main task is to use interest rates as a tool to keep the annual inflation rate close to 2.0 percent and thereby preserve the value of money.

British inflation spiked to 3.3 percent in November, up from 3.2 percent in October, on the back of soaring clothing, food and oil costs. December data will be published on Tuesday.

Many experts believe that inflation could hit 4.0 percent this year on the back of domestic energy price hikes, rising commodity markets and the government\’s recent increase in sales tax.

ING economist Rob Carnell said the BoE had decided to sit tight "despite rising pressure on the bank to acknowledge the high prevailing rates of inflation and rising inflation expectations."

However, other analysts believe that inflation could drop in the longer term, especially as the recent sales tax hike drops out of the equation.

At the start of January, Britain\’s VAT sales tax on goods and services was hiked to 20 percent from 17.5 percent as part of the coalition government\’s deficit-slashing measures.

"With price growth being primarily driven by government policy (VAT increases) and short-term commodity price shocks, rather than an overheating economy, raising rates now seems premature," said Scott Corfe at the Centre for Economics and Business Research.

"Excluding indirect taxes such as VAT, annual consumer price inflation was only 1.6 percent in November — hardly indicative of out-of-control underlying inflation.

"Once the impact of VAT on prices drops out of inflation measures in 2012, we anticipate a significant fall in inflation — to a level comfortably within the target range."

Nevertheless, Prime Minister David Cameron remains uneasy over the current high level of inflation, describing it as "concerning" in a recent media interview.

Back in March 2009, the BoE slashed rates to 0.50 percent and launched a radical quantitative easing (QE) programme to help drag Britain out of a deep recession that had been sparked by the global financial crisis.

The recession ended later that year but concerns remain that massive public spending cuts could help spark a so-called "double dip" downturn.

Under QE, the bank has created some 200 billion pounds (236 billion euros, 314 billion dollars) of new money by purchasing government bonds and high-quality private sector assets.


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