Interest rates remain at 0.5%
The Bank of England (BoE) ignored market pressure for a hike in the base rate today and kept it anchored at 0.5% for the 24th consecutive month.
Governor Mervyn King and the rest of the Monetary Policy Committee (MPC) also voted to maintain quantitative easing at its current level.
In recent weeks some committee members have spoken in a tone that indicated the MPC was edging closer to an interest rate rise.
Persistently high inflation has been the most significant factor for those who think the time is right for a policy change.
Renowned hawk on the committee, Andrew Sentence, last month voted for a rate rise of 50 basis points, while internal member and chief economist of the Bank of England Spencer Dale joined Martin Weale to call for a 25 basis point increase.
The break-down of today's vote will not be known for another two weeks, but all eyes will be on deputy governor of the Bank of England Charlie Bean who earlier in the month appeared to be veering towards the hawk's case.
Much of the discussion in previous meetings has surrounded the inflation rate, which is currently well above the target rate of 2%, and whether inflationary pressures are temporary or more structural.
Doves such as King have argued that inflation will calm once oil prices return to more typical levels and when the VAT rise implemented at the start of 2011 has been absorbed.
The Sentence camp counter this with concerns that inflation will become imbedded if wage settlements start to jump because consumers have lost faith in the BoE to return inflation to its target level.
This article was written for Interactive Investor
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.