BoE keeps interest rates at 5%

The Bank of England has kept interest rates steady at 5%, despite calls from business groups to cut the cost of borrowing.

Economic analysts said the Monetary Policy Committee (MPC), which controls interest rates, was faced with a difficult dilemma at the interest rate vote.

Graeme Leach, chief economist at the Institute of Directors, said: “If the MPC reduces interest rates, it risks losing control of inflation. Conversely, if it increases interest rates, it risks losing control of growth and could trigger a recession.”

Inflation currently stands at 3.3%, well above the 2% target rate. However, business groups have stated that the MPC should be prepared to cut rates to avoid further economic slowdown.

Lee Hopley, economist at the manufacturing body EEF, said: “If further gloom descends and the economic downturn gathers pace, the Bank needs to be ready and willing to cut interest rates once again.”

According to Rey Boulger of mortgage advisor John Charcol, the MPC’s decision had been expected, but it now put the Bank of England under pressure to try and revive the economy.

He said: “With the economic news from nearly all sectors of the economy getting worse by the day, a rate cut is badly needed to help restore some confidence to consumers and reduce the financial pressures on both them and industry.”

The Trade Union Congress also put pressure on the MPC. Adam Lent, TUC head of economic and social affairs, said: “This was the wrong decision. The knock-on effects of the credit crunch and the rush of overly-gloomy headlines are already threatening an over-reaction and deeper down-turn than the actual economic news suggests.”

Meanwhile, a report from accountants PricewaterhouseCoopers indicated that higher living costs would mean that economic growth would worsen in 2009.

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