Will 2011 continue to spell a hold for interest rates?
It’s the question everyone is speculating about; with the Bank of England under increasing pressure, will rates remain on hold or rise with the threat of increasing inflation already upon us? Rates have been held at a record low of 0.5% since May 2009 and many investors believe that the MPC could announce a rise as early as this May.
With petrol prices, gas bills and food prices rising, there is increasing pressure on the BoE, which indubitably means that at some point it will need to demonstrate its commitment to fighting inflation and push the rates up. Others argue that the economy is still fragile and interest rates must remain low to offset the ‘fiscal squeeze’ and that a premature rise could derail the recovery.
The weak pound is also adding to the strain of the general public’s wallets, making it more expensive to buy foreign goods. With inflation at 3.7%, almost twice the Bank of England’s 2% target, the argument for a rate rise to combat high inflation is valid. Such inflation forecasts from the Bank of England have caused many to believe that they have lost their credibility and the credentials to keep inflation under control.
The overall impression from economists is that rates will rise towards the end of this year, but still may not reach 1%. Some however believe that unless inflation rapidly surges out of control then the Bank of England will be in no hurry to increase rates. Are we now at a pivotal point where increasing pressure could spell a rise?
With inflation having been well over the bank’s 2% target for over a year it’s becoming harder to dismiss a decision of a rise. 2011 looks to bring more uncertainty about the economy and we are still a long way off a full recovery. We are yet to see whether the BoE will take the ‘wait-and-see’ approach or give-in to the pressures and up its rate.