BoE Holds Rates at 5%

The Bank of England’s monetary policy committee left interest rates unchanged at 5 per cent as expected on Thursday, with its room for manoeuvre severely limited by intense inflationary pressures and bleak prospects for economic growth.

Even the most fervent proponents of rate cuts were resigned to rates staying on hold after consumer price inflation climbed to 3 per cent last month, a full percentage point above target, leading markets to price out any chance of near-term monetary easing.

MPC members will not yet have seen a preview of this month’s CPI reading, but they will have had an advance copy of the Bank’s own survey of inflationary expectations. This is likely to show people expect inflation to climb over 4 per cent in the next year – in line with many economists’ forecasts for actual outcomes.

It will now be extremely difficult for the Bank to contemplate easing policy until inflation has passed its peak. Policymakers are conscious that the credibility of the Bank’s 2 per cent inflation target is at stake, and have repeatedly signalled they will countenance a prolonged period of weak growth to bring inflation under control.

This month’s decision will not have been an easy one for policymakers confronted with mounting evidence that growth is weakening, consumer spending slowing, and even the resilient labour market starting to show signs of stress.

The survey of purchasing managers’ for the manufacturing and services sector earlier this week showed activity at levels where the Bank has almost invariably cut rates in the past, and some economists think that when minutes of the MPC meeting are published, they could reveal a three-way split on the committee.

Some economists say markets overreacted to inflation data by pricing out any chance of rate cuts this year and even hinted at an eventual rate rise. Those hawkish expectations have eased slightly after the latest weak data.

BoE Holds Rates at 5%, Bloomberg
6/5/2008 6:49:48 AM