Bank of England has kept its lending rate at the historic low level of 0.5 percent for 22 straight months on Thursday, giving credence to the belief that the spike in inflation will moderate in the months ahead and any rate hike will impact recovery adversely.
The Consumer Price Index (CPI) rise was recorded at 3.3 percent in November and is expected to breach the 4 percent barrier in the coming months due to high energy and commodity prices worldwide and higher VAT imposed by the government.
The central bank said it expects inflation to come down to 2 percent by early next year and termed the spike in inflation as temporary.
A recent survey of economists indicated that a rate hike was unlikely and the bank will not alter its Quantitative Easing (QE) measures undertaken between March 2009 and February 2010, to ensure that there is sufficient liquidity in the system.
However, economists believe that BoE may be forced to hike rates by May this year if inflation does not come down on mounting public pressure.
The minutes of the Monetary Policy Committee’s meeting will not be available till January 26; however, experts expect a three way split among the members as has been witnessed since October.
Members of the Monetary Policy Committee have diametrically opposite views with Andrew Sentance calling for a rate hike since the economy is no longer in recession while his colleague Adam Posen believes lower rates should continue along with more QE measures to ensure that businesses get access to cheaper loans.
The economy is giving out mixed signals and it’s difficult for the bank to judge the real impact of coldest winter in 100 years, on the economy. Though manufacturing has picked up due to demand from overseas markets, the domestic market focused services sector is yet to pick up due government austerity measures and looming public sector job cuts.