Base rate frozen amid uncertainty

The Bank of England’s base rate decision was overshadowed by uncertainty over the new government.

The Bank’s Monetary Policy Committee decided to keep the base rate at 0.5% for the 14th month running, while maintaining its quantitative easing programme.

The Consumer Prices Index measure of annual inflation is at 3.4%, significantly above the 2% target imposed by the previous government, which means there is a risk that rates will rise.

But many believe that the Bank now has little choice but to wait and see what fiscal policies the new government comes out with before deciding whether or not to increase interest rates.

Charles Davis, senior economist at the Centre for Economics and Business Research, says: “The key risk on the horizon is that political uncertainty results in a lack of clarity on the fiscal position. This would lead to a further depreciation of sterling along with imported inflation, forcing the Bank’s hand with regard to tightening monetary policy soon.

“If the government can detail its deficit reduction plans and the pound avoids further substantial depreciation we expect the Bank to keep rates on hold into 2011 – but this is a big if given the uncertainty over how the new political arrangement will work.”

Ray Boulger, senior technical manager at John Charcol, says: “There are still enough concerns about the health of the global economy – as witnessed by the recent massive bailout in the eurozone – to suggest that it may be too early to start tightening monetary policy.”