Bank of England leaves interest rates on hold

The Bank of England has left UK interest rates on hold at 4.5% for the second month running.

The Bank’s Monetary Policy Committee had reduced interest rates from 4.75% in August, in an attempt to reverse a slump in consumer spending.

However, retail sales volumes fell at their fastest pace for 22 years last month.

Rising inflation, mainly due to oil price increases, is likely to deter the MPC from reducing interest rates any further in the short-term. Inflation rose to 2.4% in August, 0.4% higher than Chancellor Gordon Brown’s target of 2%.

However, some analysts remain hopeful that a further rate cut may be announced in November.

David Frost, Director General of the British Chambers of Commerce, said that Thursday’s decision had been expected. He said: “Given the immediate uncertainties, we were not surprised that that the committee has decided to take time to assess the economic circumstances, before taking action. However, it is critically important that the MPC should maintain a flexible approach, and should stand ready to counter the sharp slowdown in the pace of economic activity.

"Year-on-year GDP growth has been revised down to 1.5%, which is a 12-year low. Higher oil prices mean inflation has increased to above 2%. Unemployment has risen in each of the last seven months. The housing market weakening will continue to dampen consumer spending.

"With UK GDP growth firmly below trend, there is a clear risk that unemployment will rise further. Against this background, we believe that a further cut in interest rates may be needed later in the year. The MPC must signal clearly that if economic circumstances continue to worsen, they will not hesitate to act resolutely."

Kevin Hawkins, Director General of the British Retail Consortium, said: "The BRC is disappointed the MPC did not make a further reduction to interest rates today. The weak consumer sentiment does not appear to be subsiding and so the MPC's decision does not reflect the reality on the high street. One reduction, while welcome, will still take some months to work through to the consumer and have any effect. A further cut between now and Christmas is necessary if we are to see any positive change in the retail climate."

(KMcA)