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September 6, 2007

Base rate held at 5.75%

by Gill Montia

Story link: Base rate held at 5.75%

The Bank of England’s Monetary Policy Committee (MPC) is keeping the base rate at 5.75%, in September.

The bank’s announcement was accompanied by a statement in which the MPC said that it had considered the effects that recent pressures on the credit markets could have on the rate of inflation.

The committee believes it is too soon to tell how far the disruption in financial markets will reduce the availability of credit to both businesses and households.

The statement was, in itself, unusual because statements are normally issued when there is a change in the base rate.

The base rate has not risen since July and latest figures show inflation at 1.9%, just below the bank’s target of 2.00%.

Economists had been predicting that the rate would reach 6% before the end of 2007, but recent turbulence in the financial markets make a further rise this year seem less likely.

As the US sub-prime mortgage crisis continues its impact on the financial markets, banks are less willing to lend money and as a result, market interest rates have been rising.

In these circumstances a rise in the base rate may not be so necessary to control inflation.

An early respondent to the MPC’s statement was the British Chambers of Commerce.

Its economic adviser, David Kern, believes that keeping rates on hold can be interpreted as “a mere short-lived postponement”.

 

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