Bank of England Holds The Interest Rate

There had been calls for the Bank of England to cut its base interest rate from the level of 5.75%. In the end the Monetary Policy Committee (MPC) resisted, and left the rate unchanged. This was the first decision on interest rates since the credit crisis devastated Northern Rock.

Many though that the Bank would take the interest rate down by quarter of a percent to try and boost confidence in the economy at a time when everyone is beginning to suffer from the lack of credit.

Leading lights in the City, together with retailers and union leaders, had called for a rate cut, but the Bank held firm as it continued to concentrate on its brief to keep inflation under control rather than assist the economy. Actually, inflation is at 1.8% - under the Government’s target of 2% - but the Bank has worries that rising prices of food and oil will take inflation back above 2% in the coming months. Sterling fared well from the news of the rate hold and went a quarter of a cent higher.

Economists still reckon that a rate cut will be needed soon, and the next movement should certainly be down, not up.

Malcolm Barr, of JPMorgan, said: “An impact from credit market events may be in the pipeline, but it is taking time to express itself in actual growth and spending behaviour. We continue to anticipate an easing from the Bank of England in early 2008 rather than this year.”

James Knightley, of ING, was even more forceful; he said: “With the housing market moderating and financial market conditions a clear cause for concern, we suspect that the Bank of England will be cutting rates towards 5% in 2008.”

Lending amongst banks has almost come to a standstill in recent weeks, which caused Northern Rock to seek help from the Bank of England. In September, the US Federal Reserve cut its rate by 0.5% to increase liquidity in the markets, and it was suspected that the Bank of England might follow to the tune of 0.25%. It decided not to act precipitously.

There had been fears that the European Central Bank might raise eurozone rates, but it held them at 4%