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Bank of England holds firm on monetary policy for now
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Interest rates have been kept on hold once again at the historic low of 0.5 per cent.
The Bank of England's Monetary Policy Committee (MPC) chose to freeze the base rate for the 24th consecutive month, despite increasing fears from some over the rate of inflation.
With the Consumer Price Index measure rising 0.4 per cent to 3.7 per cent in December 2010, some commentators have called for the Bank to undertake a shift in monetary policy.
But the MPC has held firm for the short term at least, a decision that has received support from the Confederation of British Industry (CBI) and British Chambers of Commerce (BCC).
Ian McCafferty, chief economic adviser at the CBI, said the decision to keep rates the same is not a surprise, but with more MPC members showing their concerns about inflationary pressures, the Bank is in the process of shifting its stance.
He said that while economic growth was likely in Q1 2011, recent indicators suggest the inflation outlook has worsened.
"We expect the Bank to start preparing the ground for a gradual normalisation of monetary policy around the second quarter of the year," Mr McCafferty stated.
Meanwhile, David Kern, chief economist at the BCC, expressed concerns about growing demands for an early increase in rates.
"This introduces a regrettable element of uncertainty about future policy at a time when the economy is still facing major risks," he claimed.
"Fears around inflation are understandable, but the MPC must not overreact. As long as wage increases remain modest, and disposable incomes continue to be squeezed, it remains likely that the surge in inflation will be reversed."
Mr Kern said that pressures on businesses and individuals will begin to intensify over the coming months, and a premature increase in rates, at a time when fiscal policy is still being tightened, will threaten the recovery.
"It is likely that higher interest rates will be necessary later this year, but it is important for the MPC to wait until the economy has absorbed the initial impact of the austerity plan," he stated.
The Bank of England has frozen interest rates at 0.5 per cent since March 2009. Just six months earlier, they had stood at five per cent.
Posted by Jon Aspinell
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