Bank expected to resist calls for increase in interest rates

Published on Wednesday 2 March 2011 16:00

PRESSURE to raise interest rates will be maintained this week, but a series of gloomy economic reports will prevent the Bank of England from pushing up borrowing costs at its latest rate-setting meeting.

Economists have not ruled out a quarter-point rise at the conclusion of Thursday's gathering of Monetary Policy Committee (MPC) members.

However, the consensus forecast is for a further freeze, which would mark the second anniversary of the MPC's decision to reduce rates to their historic low of 0.5 per cent.

Central bank policymakers face a difficult balancing act, with inflationary pressures on the one hand and fears of a double-dip recession on the other.

At last month's meeting, a third member of the MPC - Spencer Dale - joined his hawkish colleagues Andrew Sentance and Martin Weale in voting for higher rates, giving a 6-3 vote against a 7-2 vote at the January meeting.

But recent economic data has highlighted the fragility of the economic recovery, culminating in last week's revelation that Britain's services sector came off the boil last month.

A surprise 0.6 per cent contraction in GDP in the final quarter of 2010 - deeper than previously thought - has also made the Bank of England wary of raising interest rates too rapidly, despite consumer price inflation running at double its 2 per cent target.

Howard Archer, chief UK economist at IHS Global Insight, said a rates hold was the most likely outcome this week, adding that a hike to 0.75 per cent "cannot be ruled out" given February's vote.

"The hawks are on the ascendancy but they have not yet won the interest rate hike battle," he said. "Whether or not the Bank of England acts by May or June will depend critically on how well the economy performs over the coming weeks as the fiscal tightening really kicks in."