This week, the Bank of England (BoE) made the decision to hold the interest rate at 5 percent for another month. It decreased the rate by a quarter percent last month, but it is thought that they held this month to stave off further inflation. Graeme Leach, chief economist at the Institute of Directors said, "This was a prudent decision. Back-to-back interest rate reductions would have given a signal that inflation was yesterday's problem, when in reality, it is still today's and tomorrow's."
Those most displeased with the news of the rate hold are those involved in the housing market. They were hoping and expecting a rate cut to help boost growth in the market and to preempt further market slowdown. Others, however, know that it's necessary to hold the rate instead of cutting it in order to combat inflation.
Unlike the US Federal Reserve, which has cut rates seven times in the last seven months to 2 percent, the BoE maintains a stronger monetary policy. Many believe that it would have been a sign to analysts of weakening policy had the BoE decided to cut rates two times in a row. Others, however, such as economist Simon Hayes of Barclays say, "We see the decision as tactical rather than reflecting a fundamental reluctance to loosen policy further."
While most analysts predicted that the BoE would not lower rates in May due to the cut in April, they predict that rates will be cut in June. The Monetary Policy Committee (MPC) traditionally refutes allegations that slowdowns in the housing market have anything to do with consumer spending, but there is widespread evidence that both the retail and the service sectors are taking hits as the entire economy is beginning to feel a slowdown. It's this evidence that leads economists and analysts to believe there will be a rate cut in June.
The BoE made no statement on why they chose to hold the rate at 5 percent, but it's probable that the MPC feels that the economy hasn't yet slowed down enough to bring inflation down to target. It is expected that the BoE will release a statement about their decision this week when they publish their quarterly inflation report. Experts believe that the economic outlook for growth and inflation will look worse in this report than it did in the last report made in February.
http://www.simplyfinance.co.uk
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