Interest rates on hold as fears remain

Published on Saturday 2 August 2008 15:37

INTEREST rates are expected to be held in Britain and the US this week as the Bank of England and Federal Reserve battle with the economic downturn and inflation.

The Bank of England is expected to hold interest rates at 5% on Thursday amid fears that inflation will rise above 4% next year. However, the decision is expected to be a difficult one following July's meeting of the Monetary Policy Committee, which saw a three-way split in votes.

David Blanchflower said a rate cut was needed to prevent the economy slipping into recession, while fellow member Tim Besley wanted to hike rates to show the Bank was serious about fighting inflation. The remaining seven members chose to leave rates on hold.

Howard Archer, chief European and UK economist with Global Insight, said that if the Bank of England does move interest rates in the near term it will be more likely to raise them rather than cut them.

He anticipates interest rates will stay at 5% until the end of 2008, before being cut steadily to 4.25% by mid-2009 and to 3.75% by the fourth quarter of next year.