Page last updated at 11:21 GMT, Thursday, 7 August 2008 12:21 UK

Bank holds UK interest rate at 5%


The Bank of England has kept interest rates on hold at 5% as it struggles to deal with a slowing economy and spiralling inflation.

Many reports have shown the economy heading for a significant slowdown or even a recession.

But the Monetary Policy Committee's primary goal is to keep inflation at 2% and it currently stands at 3.8%.

Although the bulk of members voted to hold rates last month, one supported a cut, while another backed an increase.

Some analysts had forecast rates would rise this month to tackle inflation.

More inflation rises?

A cut in interest rates may be needed sooner rather than later to prevent the economy from drifting towards recession
Lee Hopley, EEF

Most evidence points to annual consumer price inflation rising above 4% when July's figure is published next week.

And some economists feel inflation could top 5% before the end of the year, as energy firms raise their prices.

At the same time, activity is slowing in all key sectors of the economy, business confidence is waning and falling house prices and tight credit conditions have dented consumer spending.

The economy grew just 0.2% in the second quarter and, on Wednesday, the International Monetary Fund again revised down its forecast for UK economic growth this year and next year.

It now expects growth of 1.4% this year and 1.1% in 2009, although the government still expects the figures for both years to be 2% or above.

Shifting risk

Despite the economy seeing its most significant slowdown since the early 1990s, the bank had held rates because of fears of "pushing the economy into recession", said Hetal Mehta, senior economic advisor to the Ernst & Young Item Club.

"It should not have come as surprise to anyone that, on balance, the bank felt it could do nothing but sit tight this month - a situation that is likely to prevail for a few more months."

However, the fall in the price of oil, from peaks of $147 a barrel last month to about $120 may allow rates to be cut as early as November, she added.

Manufacturers group, EEF, said that the decision to hold rates was understandable in the light of high inflation, but warned that a cut in interest rates may be needed amid further signs of a weakening UK economy.

Danger of recession

"The MPC continues to be pulled in opposing directions by rising inflation and slowing growth," said the EEF's head of economic policy, Lee Hopley.

"However, the balance of risk appears to be shifting more rapidly. A cut in interest rates may be needed sooner rather than later to prevent the economy from drifting towards recession."

The British Chambers of Commerce's economic adviser, David Kern said that rates needed to fall as soon as inflation had peaked.

"The MPC cannot ignore the fact that recession threats have worsened," he said.

"While the near-term rise in inflation is unavoidable, it is also temporary as weaker growth would clearly push down inflation sharply next year. Limiting the threat of a major recession must be the priority."

The British Retail Consortium agreed that a rate cut was needed "as soon as conditions allow".

"Weakening sales and record low consumer confidence show the downturn is deepening," said the BRC's director general Stephen Robertson.

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