As expected, the Bank of England kept interest rates on hold at 5.25% today. Last month, the Monetary Policy Committee voted unanimously to cut rates in response to slowing growth, but this month fighting inflation (which is, remember, their remit – not propping up housing bubbles) seems to have been uppermost in the minds of MPC members.
Deputy governor Rachel Lomax warned last week that higher commodity prices were feeding through into inflation, which could become entrenched if consumers begin to expect price rises. Surveys out this week showed that factory and service sector prices rose at their fastest pace on record last month. And just yesterday the British Retail Consortium announced that shop prices rose 1.3% in February, the biggest monthly increase since the index began, mainly due to galloping food price inflation.
All of which means Governor Mervyn King will probably be obliged to write a letter explaining why the 2% CPI target has been breached ‘by the Autumn’, Charles Stanley economist Edward Menashy predicted today.
Of course, the Bank always has the option of raising interest rates, but with both consumers and corporates struggling access credit, and house prices and consumer spending falling, the move would certainly be an unpopular one.
And there are plenty of people who would only be happy with cuts. David Kern of the British Chambers of Commerce called today’s decision ‘mistaken’ and argued that countering ‘immediate acute risks to growth’ should be a priority.
Who’d want to be a member of the MPC right now?