Inflation rise gives Bank rates dilemma

Published on Thursday 12 May 2011 16:36

INFLATION figures for April are expected to add to the conundrum facing the Bank of England as it struggles to balance rising prices and lacklustre economic growth.

Official figures on Tuesday are expected to show inflation climbed back up to 4.2 per cent last month after a surprise dip in the consumer prices index (CPI) to 4 per cent in March.

But despite rising prices and an admission by the central bank that the CPI is likely to hit 5 per cent later this year, minutes of this month's monetary policy committee (MPC) meeting, released on Wednesday, are unlikely to reveal any appetite for raising rates.

In his final meeting before leaving the committee, the MPC's most hawkish member, Andrew Sentance, is expected to have voted once again for a 50 basis point rise, to 1 per cent.

But there is speculation that the two members who also voted to raise rates in recent meetings may have become more cautious in the face of the UK's worryingly low GDP growth in the first quarter.

Raising interest rates from their current historic low might help check inflation, but would be unpopular among businesses still struggling to emerge from the 2008 downturn and could set back Britain's already lacklustre growth.

Edinburgh-based insolvency expert Tom MacLennan, head of recovery at RSM Tenon, said low interest rates were helping many struggling Scottish companies to stay in business.

He said: "While we may be technically out of recession it certainly doesn't feel like that. There's an awful lot of people working very hard to keep their businesses alive. They have been aided greatly by low interest rates."

He said the collapse in property prices was still working its way through the system, with between 60 and 70 per cent of the insolvencies RSM has dealt with recently being property related.

MacLennan, a veteran of the recessions of the early 80s and 90s, said this one felt like it still had a few years to run. "I certainly don't see a huge amount of improvement this year or next year," he said.