BOE leave interest rates unchanged at 5.25%
6 March 2008
As widely expected, the Bank of England elected to keep interest rates on hold at 5.25%. The Bank of England cut interest rates in February for the second time in 3 months in an attempt to shore up the economy in the face of global financial market turbulence. The MPC remains in a difficult position, as price pressures continue to intensify in the face of weakening consumer confidence and a slowing housing market.
We saw a pickup in both manufacturing and service sector activity this week which will ease concerns over economic slowdown, however prices rose to record highs, thus denting hopes for further interest rate cuts. In particular, British service sector activity, which accounts for approximately three quarters of UK GDP picked up to its fastest pace in five months in February, while inflation pressures surged at their strongest rate for twelve years. The data backs up official PPI readings already at record highs, fuelling fears that Consumer Price Inflation could push beyond 3.0% before long, thus prompting an explanatory letter from Bank Governor Mervyn King to the Chancellor.
The market’s attention now focuses on any accompanying statement and the BoE minutes in two weeks time in order to establish the Bank’s interpretation of recent inflationary concerns.