MPC expected to hold interest rates despite worries over inflation

Published on Saturday 8 May 2010 15:02

BANK of England rate-setters are expected to maintain their "wait and see" stance tomorrow despite growing fears of a spike in inflation.

The economic uncertainty triggered by a hung parliament and ongoing stock market volatility will also play on the minds of the bank's Monetary Policy Committee (MPC) as it concludes its monthly meeting.

However, economists widely expect a further freeze on interest rates, leaving them at a record low of 0.5 per cent.

Having ended its asset-purchasing programme in February, the central bank is also poised to leave quantitative easing unchanged at 200 million.

Tomorrow's midday announcement will come at the end of a tense two-day meeting which was pushed back because of last week's general election.

Friday's opening session coincided with the release of official data showing factory gate prices rising at their fastest pace in 18 months.

News of a 5.7 per cent surge in output prices – much higher than expected – is sure to have stoked fears among some MPC members of a protracted period of inflation.

Consumer inflation hit 3.4 per cent in March, up from 3 per cent a month earlier.

Many experts expect that rate to fall back sharply later this year as VAT and energy effects fade. But if April's reading remains a percentage point above the government's 2 per cent target, bank governor Mervyn King will be forced to write another letter of explanation to the Chancellor.

Citing March's inflation spike, mixed economic survey data and the Greek/eurozone crisis, Howard Archer, chief UK economist at IHS Global Insight, said matters had become "more complicated" for the MPC.

"Given all of these factors, there is a compelling case for the Bank of England to remain in 'wait and see' mode in the near term at least," he said.

"We still retain the view that whenever interest rates do start to rise, the increases are likely to be gradual and limited due to the need to offset the marked tightening in fiscal policy that will start in 2011 at the latest."

All nine members of the MPC voted to keep borrowing costs on hold last month, although some policymakers voiced concerns over stubbornly high inflation levels, minutes of the meeting showed.

A no-change vote tomorrow would mark the 14th successive month rates have been frozen.

Investec economist Philip Shaw said: "There's a close to zero chance of any change in policy at Monday's meeting."