Despite high inflation and rising commodity prices, the Bank of England is likely to continue with the current key rate of 0.5% when the MPC meet next week.
The bank is expected to continue with low rates after PMI survey conducted by Markit showed that economic growth will remain at 0.3% in the second quarter of the year.
“We’d be very surprised indeed if there was a hike. If anything, the dynamic on the Monetary Policy Committee has shifted slightly more towards steady policy. There’s been a wave of weak data globally”, said Philip Shaw, economist at Investec.
Bank of England is not expected to raise rates till November, economists say, unlike the European Central Bank (ECB), which raised rates in April for the first time in two years and plans to raise rates further in July.
Bank of England has kept the key interest rate at a historical low rate of 0.5% for two consecutive years – the longest period when rates have remained unchanged since the World War II.
Britain’s economy had shrunk unexpectedly in December last year and has recorded a sluggish growth of 0.5% in the first quarter of 2011. The government’s public sector spending cut has also gathered momentum complicating situations further.
Due to high commodity prices globally, inflation has remained stubbornly high at over 4 percent, more that the bank’s target of 2 percent. BoE’s Governor Mervyn King said inflation is expected to remain high for the next two years in the bank’s quarterly inflation report.
“The inflation picture hasn’t really changed materially. The PMIs have been a bit worrying but aren’t flashing alarm signals just yet”, said Credit Suisse economist Neville Hill.
Ben Broadbent – the former economist with Goldman Sachs will attend his first meeting at the Monetary Policy Committee (MPC) next week. Though he’s known to be a little hawkish, still he’s not expected to advocate a rate hike since growth report in the US and the EU region has been abysmal and a rate hike may slow down domestic demand growth.