The Bank of England ended the year as it began today as it left its emergency support for the economy unchanged.
Policymakers held interest rates at 0.5 per cent for the 20th month in a row and maintained money-boosting efforts at £200 billion under the Bank’s quantitative easing (QE) programme.
Stronger-than-expected economic growth and an improved performance in the manufacturing sector in recent months has steadied the Bank’s hands, despite expectations of a slowdown in the pace of recovery in the months ahead.
The Bank of England last altered its monetary policy in November 2009, when it increased the level of QE from £175 billion to £200 billion. Interest rates were lowered to their historic low of 0.5 per cent in March 2009.
The Monetary Policy Committee (MPC) was widely expected to leave policy unchanged following higher-than-expected third-quarter gross domestic product (GDP) growth of 0.8 per cent.
The good mood was bolstered by strong official manufacturing figures earlier this week, showing output rose 0.6 per cent month on month in October - the best reading since March and double expectations in the market.
But uncertainty returned today as the UK’s net trade - the difference between exports and imports - widened unexpectedly, knocking hopes for a private sector-led recovery.
And inflation has also been stubbornly high - rising to 3.2 per cent last month - which has prompted repeated calls from one MPC member for a quarter-point rise in interest rates.
The escalating debt crisis in the eurozone is another factor likely to have been discussed at today’s MPC meeting, as struggling countries on the Continent could affect the UK’s export trade and subsequent growth.
Economists expect another three-way split among the nine-strong MPC this month, with Andrew Sentance likely to vote for a rise in interest rates and Adam Posen expected to favour a second injection of QE.
The meeting may also have been frostier than usual following revelations at the Treasury Select Committee this month that Mr Posen and other members were concerned that governor Mervyn King had become “excessively political” in the run-up to the general election.
Midland business leaders claim the economic climate is still too fragile for a rise in interest rates and are not surprised by the Bank of England’s decision to keep the level at 0.5 per cent.
Christine Braddock, President of Birmingham Chamber of Commerce, said: “Birmingham’s annual GVA is predicted to reduce by £735 million by 2015, around four per cent of economic output. This equates to an average decline in economic growth in the city of 0.9 per cent a year over the next four years. So interest rates still need to remain unchanged.
“However, the Monetary Policy Committee will be forced into a rise soon as inflation remains at over three per cent, a figure which has been retained for every month of 2010.”
Mike Ashton, chief executive of Hereford and Worcester Chamber who has succeeded Simon Topman as chairman of the West Midlands Chambers of Commerce, said: “Manufacturing figures for October were better than expected but the volume of exports remains low.
“Forthcoming spending cuts due to the rise in VAT in Janu