Interest rates should be lower say MPs

Is the Bank too cautious when setting interest rates?

The Bank of England's monetary policy committee may have kept interest rates too high, an influential committee of MPs has said.

The cross-party Treasury Select Committee said it was "concerned that in an effort to establish ... credibility the MPC may have biased policy towards undershooting the [inflation] target".

The MPs were effectively saying that UK interest rates - now at 5.75% - may have been kept too high in recent years, increasing the cost of borrowing for consumers and business.

"If they had changed their exchange rate forecast assumption earlier, it is possible that interest rates would have been cut earlier," the Committee said.

Rate cut

The Bank unanimously voted to cut interest rates in February by 0.25%. In March, the committee voted to leave rates unchanged.

According to the minutes of the February meeting, some members of the MPC did consider cutting the key rate by 0.5%.

They decided, however, to take a more cautious approach.

The MPC thought a larger cut "might perversely damage confidence" by misleading financial markets, households and companies about its assessment of the UK economy.

It is this conservative stance that, presumably, the MPs are criticising.

Cutting interest rates makes the cost of borrowing lower and stimulates consumer spending which could lead to inflationary pressures.

The US central bank, the Federal Reserve, has cut rates three times this year and most experts believe that another UK rate cut is on the cards.

Unions and industry say another rate cut would not risk stimulating underlying inflation.

This has stood below the government's 2.5% target for the past 23 months, despite having gone up to 1.9% in February.