Midland business leaders have welcomed the decision to hold interest rates after Bank of England policymakers resisted pressure to curb rising inflation.
The no-change decision, which means the Bank’s base rate has been at 0.5% for 25 months, comes amid further signs that the UK’s economic recovery is still not strong enough to withstand the shock of higher borrowing costs.
A string of gloomy updates from the retail sector continued today with profit warnings from Carpetright and Halfords, as consumers tighten their belts in the face of economic uncertainty and higher prices, particularly for fuel.
But with inflation running at 4.4%, the Bank of England risks damaging its credibility by failing to take action over price pressures.
Three members of the nine-strong monetary policy committee voted to increase rates last month but the majority of policymakers expect inflation to peak at 5% before heading back to its 2% target next year.
Richard Halstead, Midlands director of manufacturers’ organisation the EEF, said: “The Bank is right to look through the short term rises in inflation and continue holding fire on rates for the time being. The current combination of unrest, upheaval and uncertainty we are seeing around the world poses significant risks to growth, whilst, at home, the full effects of fiscal tightening and the squeeze on consumers is still to be felt.
“Maintaining a wait and see approach is right until there are clear signs that a period of sustained economic growth is underway.”
Analysts think there is a much greater chance that interest rates will rise next month as members will have access to the Bank’s latest economic forecasts.
Policymakers have been reluctant to move on rates after a 0.5% decline in output in the final quarter of last year.
The OECD downgraded the UK’s growth prospects in the second quarter to an annualised rate of 1% last week amid the impact of Government’s austerity measures and as the crisis in Libya boosts the price of oil.
Ian McCafferty, CBI chief economic adviser, said the Bank of England was in an “unenviable position”.
He said: “Not surprisingly, they’ve elected to wait until things become a little clearer before setting their course towards any rises.
“There are conflicting messages about the low level of consumer confidence versus brighter prospects for certain sectors, which continue to cloud the issue. No doubt the MPC is waiting for further signs that the recovery is back on track before changing its stance.”
The decision to keep rates on hold was welcomed by industry leaders, particularly as UK households have just seen their first drop in disposable income in 30 years after wages failed to keep pace with prices.
Jeegar Kakkad, senior economist at EEF, the manufacturers’ organisation, said: “The current combination of unrest, upheaval and uncertainty we are seeing around the world poses significant risks to growth, whilst, at home, the full effects of fiscal tightening and the squeeze on consumers is still to be felt.
“Maintaining a wait-and-see approach is right until there are clear signs that a period of sustained economic growth is under way.”
Home-owners with tracker mortgages will continue to benefit from record low rates but savers and pensioners will see their cash pile eroded by inflation.
The Bank also kept its package of quantitative easing, designed to stimulate the economy, on hold at £200 billion.
Philip Shaw, chief economist at Investec, said: “It’s not surprising that the MPC has kept rates on hold, given the background of economic uncertainty and disappointing news from the high street.
“Our view is that the committee will not put rates up until August but it’s possible that signs of even higher inflation or a pick-up in the economy could result in a tightening as soon as the spring.”