The Bank of England's Monetary Policy Committee has held interest rates at 5.5% in spite of widespread expectations of a cut.
The move comes in the wake of sharp rises in energy prices fuelling inflation fears on the one hand, while poor sales figures from the likes of Marks & Spencer point to a slowing economy.
According to Ian Kernohan, economist at Royal London Asset Management the MPC’s inaction was not wholly unexpected, although the market would not have been surprised if they had cut rates. “I expect a cut next month and depending on how bad the news is over the next few weeks, this could be a 50bp move, as the MPC seeks to head off the risk of a recession. The February Inflation Report will provide a good opportunity to explain their strategy in greater detail, in particular their thoughts on the global economy and near-term inflation pressures.”
But according to Edward Menashy, chief economist at stockbroker Charles Stanley, the threat of inflation should not be underestimated. “Inflation is like toothpaste; once it has escaped from the tube it is very difficult to put back in!,” he said. “Hence the MPC is treading carefully.”
The Royal Institution of Chartered Surveyors took the middle view, with chief economist Simon Rubinsohn commenting: “The Bank of England was right to hold policy steady today but we suspect that if the economic newsflow continues to deteriorate over the balance of this month, it will have to lower interest rates when it meets again in February.
“In particular, it will need to keep a close watch on the next batch of retail and housing numbers for signs that consumer confidence is showing further signs of weakness. While the inflation risk can’t be dismissed too lightly, we continue to take comfort from the underlying picture on wage settlements, which is more benign than some recent headlines have suggested.
“We expect a quarter cut in the base rate next month to 5.25% and believe that this will be followed by a further move in the second quarter of the year.”
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