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 05 July 2008 20:21 BST

Bank opts to keep interest rate on hold

Thursday, 06 Sep 2007 14:30
The Bank of England announced its decision at noon
The Bank of England has opted to leave the UK's benchmark interest rate on hold at 5.75 per cent.

Analysts had widely predicted that the Bank's monetary policy committee (MPC) would vote to keep the official interest rate unchanged for the second month running, as credit fears continue to unsettle the world's financial markets.

In a statement following today's decision by the MPC, the central bank said: "It is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households."

The Bank added that the MPC was "monitoring closely the evolution of both credit spreads and the quantities of credit extended, alongside all other data relevant to the outlook for inflation" but had judged that no change in interest rates was necessary to ensure that inflation remained below target in the medium term.

Rising default levels in the US sub-prime mortgage market are responsible for the current market turmoil, with traders fearing that banks across the world will lose money as a result of exposure to bad debts in the sector.

Banks have subsequently become more cautious about whom they lend money to and analysts say that a rate hike could have exacerbated the situation, with a rise in the cost of corporate borrowing likely to impede economic growth.

Last month the Bank had hinted that a further rise in the benchmark interest rate might be needed to bring inflation under control, but recent developments led analysts to predict that it was unlikely the MPC would raise the cost of borrowing today.

"The ongoing problems and uncertainties in credit and financial markets substantially boost the case for the Bank of England to sit tight for the time being," Global Insight chief economist Howard Archer said ahead of the decision.

He added that the longer the turmoil continues, the more likely it is that the credit crunch will begin to impact upon the real economy – thus meaning that the benchmark interest rate will probably remain unchanged until at least November.

Mr Archer also stressed that there was "currently no clear economic case" for a further rise in interest rates, with inflation having unexpectedly dropped to 1.9 per cent in July.

The fall left the official rate of inflation below the Bank of England's two per cent target for the first time since March 2006.

Commenting on the MPC's decision Jonathan Said, senior economist at the Centre for Economics and Business Research, (Cebr) said: "While a number of committee members would have liked to see interest rates hit 6.0 per cent today, ongoing uncertainties in the financial markets and the risk of a fallout in the wider economy have moved the King's men to wait-and-see territory - somewhere they have not been since the first half of last year."

Today's decision by the Bank of England comes after central banks in Australia, Canada and Brazil confirmed earlier this week that they intended to keep interest rates in their respective countries on hold.

The European Central Bank also announced a similar decision today.End of story


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