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Bank of England's Hands Still Tied, Despite Inflation

The Bank of England (BoE) is widely expected to maintain interest rates at their current historic low of 0.5 percent on Thursday as new data released in the UK this week showed the economic recovery faltering.

Governor of the Bank of England Mervyn King
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Governor of the Bank of England Mervyn King

With first quarter gross domestic product (GDP) figures due to be released on April 27 - between the bank holiday break for Easter and the Royal Wedding - it had always been considered unlikely the Bank’s rate setting monetary policy committee (MPC) would act on rates this month.

The lack of action will be in stark contrast to the European Central Bank’s widely expected decision to raise interest rates for the euro zone, also due Thursday.

But the BoE remains in a position in which it has little room for manoeuvre.

On the one hand Consumer Price Index (CPI) Inflation, currently at 4.4 percent, is 2.4 percent above the central bank's target, while Retail Price Inflation (RPI) is currently about 1 percent higher still.

But at the same time economic growth indicators have suggested the recovery has been sluggish at best, leaving the BoE with the choice of raising interest rates and risking killing off still fragile economic growth or keeping them on hold and hoping inflation comes down of its own accord.

And Bank governor Mervyn King has already indicated that raising interest rates to keep hawkish economic commentators happy over inflation woudl be "self-defeating."

On Wednesday, data from the Office of National Statistics(ONS) showed industrial output contracted by 1.2 percent in February after downwardly-revised growth of 0.3 percent in January.

Economists had forecast a 0.4 percent increase in industrial output over the month; the fall was the biggest since August 2009.

Halifax,the UK’s biggest mortgage lender, said on Wednesday that house prices continued to fall in the first quarter of 2011. As of the end of March the lender said average house prices had fallen by around £5,500 or 2.9 percent in the last year.

Although month on month the housing market had steadied, with house prices rising by 0.1 percent, overall the first quarter had seen the value of the average home fall by 0.6 percent.

"Our forecast remains for a 2 percent decrease in house prices in 2011 as a whole. Uncertainty over the general economic outlook and individual financial circumstances are likely to constrain housing demand, resulting in some modest downward pressure on prices," Martin Ellis, housing economist for Halifax said.

Meanwhile, new car sales in the UK fell 7.9 percent year on year, the Society of Motor Manufacturers and Traders (SMMT) said on Wednesday.

Registrations were down by 8.7 percent over the first three months of the year and the 2011 market is forecast to drop by five percent to 1.93 million units, industry body the SMMT said in its monthly sales update.

The SMMT said it expected sales to continue to fall in the second quarter as consumers felt the impact of higher taxation and rising inflation combined with subdued wage rises and fears of job security as a result of government spending cuts.

And the British Chamber of Commerce (BCC) said on Tuesday that the economic recovery in the UK was uncertain while the outlook was “worrying” as it published its latest survey of manufacturing sales data.

In a poll carried out by Reuters earlier this week all but one of 67 economists said they expected the MPC to leave interest rates at 0.5 percent.

"The case for holding fire on interest rates for now at least is supported by still serious uncertainties and concerns about the underlying strength of the UK economy and its ability to withstand the increasing fiscal squeeze," Howard Archer, chief European and UK economist at IHS Global Insight added.

Contact Europe: Economy

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