BoE interest rates expected to remain at low

The Bank of England is today expected to resist pressure to hike interest rates despite fears over surging inflation and commodity prices.

Policymakers are unlikely to raise the Bank’s base rate, which is at an all-time low of 0.5%, for fear of jeopardising the feeble economic recovery.

However some economists think the Bank will have to act soon in order to control inflation, which hit 3.3% as measured by the consumer price index (CPI) in November, fuelled by the rising cost of food, clothes and oil.

The Bank’s policy-setters, who are tasked with keeping CPI inflation at 2%, have admitted it could hit 4% by the spring but would rather leave rates unchanged and brave above-target inflation than risk tipping the economy back into a “double-dip recession”, said economists.

Putting up interest rates may help reduce inflation but it would also restrict the spending power of homeowners with tracker mortgages and people repaying other debts, which would further endanger the recovery.

Another round of quantitative easing, or money printing, is also not expected because this would further add to inflationary pressures.

Howard Archer, chief economist at IHS Global Insight, said: “The Bank’s Monetary Policy Committee (MPC) is now in a very difficult position.

“Although the UK market achieved very decent growth in the second and third quarters it is still in a very fragile state following the deep recession.

“We suspect most committee members will be reluctant to adjust policy until they get a clear idea of how the economy is reacting to fiscal policy being tightened from the start of 2011.”

Consumers’ spending power is being squeezed because pay packets are not keeping up with inflation.

There has been a barrage of bad news for cash-strapped consumers in recent weeks as petrol, gas and clothes all rose in price, and last week’s VAT rise from 17.5% to 20% pushed up the cost of most goods and services.

Prime Minister David Cameron this week told the BBC that inflation was “concerning” and “well outside what the Bank is meant to deliver”.

MPC member Andrew Sentance, has repeatedly called for gradual interest rate rises to stave off the rising threat of inflation.

But the consensus of the committee is that most of the inflationary pressures should fall away in a year’s time.

And there are concerns over the strength of the recovery, which weakened in December, hindered by the Arctic weather.

Markit/CIPS data showed that the construction sector fell further into decline in the month, while the powerhouse services sector contracted marginally for the first time in 20 months, leaving only the manufacturing sector in growth.

GDP figures for the second and third quarters were also revised down from 1.2% to 1.1% and from 0.8% to 0.7% respectively, adding to fears over the strength of the recovery.

Markit economists said the recovery had “near-stagnated” and expect the UK’s GDP growth in the fourth quarter of 2010 to be just 0.4%.

British Retail Consortium figures released earlier this week showed sales in December were at their worst for eight months as the snowy weather and money worries caused shoppers to cut back on buying presents.

Economists disagree on when interest rates, which have been at their current level since March 2009, will rise.

Last month, the CBI warned that rates would start to rise by the spring and the base rate would hit 2.75% by the final quarter of 2012.