Bank of England holds firm with interest rates

Once again the Bank of England held its rate at 0.5%, a record low that has been unchanged since March 2009.  Thursday’s announcement came as no surprise, but the Bank does have a dilemma regarding the most effective way to stimulate an economic recovery.  The government is hoping that low rates will help to offset its major spending cuts, but inflation is the big worry for consumers.

England’s current rate of inflation is more than twice the 2% target, at 4.4%, and twice that of the euro zone.  An increase in BoE rates would help to bring the inflation rate down, but would also put a damper on an already sluggish recovery.  Chancellor Osborne continues to warn that Britain could find itself in the same position as Greece, Portugal and Ireland if the budget deficit is not reduced significantly and soon.

With the continuing pressure of rising inflation, there is a good chance that BoE will decide to change its stance in the next few months.  Three voters on the nine-member BoE Committee were for an increase this month, and insiders say the others will probably change their votes if the economy shows signs of improvement in the near future.

The European Central Bank (ECB) has just raised its rate for the first time since 2008, to 1.25%, to combat rising inflation in the European sector, but for the moment BoE is concentrating on economic recovery and hoping the inflation rate will level off or drop over the coming months.