BUSINESSES have backed the Bank of England’s decision to keep interest rates at a record low of 0.5% for the 27th month in a row.
The monetary policy committee (MPC) is not expected to increase the rate until November at the earliest as concerns over economic growth outweigh those over the rise in inflation, which hit 4.5% in April – the highest rate for more than two years.
Business leaders have welcomed the bank’s stance and warned a rate hike would throw the economic recovery off course, particularly after GDP figures for the first quarter of 2011 showed tepid growth of 0.5%.
Ross Smith, head of policy at the North East Chamber of Commerce, said: “This is the right decision right now. While inflation is running high, it’s only to a limited extent that it’s flowing through into demands for higher wages.
“The concern for NECC members is to keep the cost of borrowing low in order to maintain that stimulus for quicker economic recovery.”
Ian McCafferty, CBI’s chief economic adviser, said the MPC was right to wait for clearer signs that growth is gathering pace before changing its stance on interest rates.
He said: “Although the recovery is expected to make further headway into the second half of the year, households continue to face particularly challenging conditions, and business confidence remains fragile.”
Borrowers are seeing the benefits of expectations that it will be some months before rates rise, with the average cost of a two-year fixed-rate mortgage falling to 4.41%, its lowest level since the beginning of the year, following a drop in swap rates, upon which the deals are partially based.
But the delay is bad news for savers, who will continue to suffer from low returns on their money at a time when high inflation is eroding the value of their deposits.
Graeme Leach, chief economist at the Institute of Directors, said: “With the money supply, credit and wage growth of the economy so weak, it was right that the MPC kept interest rates on hold.”
The bank has warned inflation will rise above 5% later this year and remain above the Government’s 2% target throughout 2012, before falling back in 2013.
Simon Hayes, economist at Barclays Capital, warned that inflation was damaging the MPC’s credibility.
He said: “High inflation is now frequently cited as being harmful to household sentiment. With inflation rising once more, questions about the committee’s commitment to the 2% target are likely to persist.”
