Base rate held at 5%

by Gill Montia

Story link: Base rate held at 5%

The Bank of England’s Monetary Policy Committee (MPC) has once again voted to keep the base rate on hold at 5%.

The decision to maintain interest rates in August means that, despite rising inflation, the base rate has remained steady since a 0.25% reduction in April.

Deepening gloom over the economic outlook left the MPC with a difficult decision, as it has to balance the dangers of economic slowdown with the prospect of inflation hitting 5% later this year, driven by higher food and energy prices.

Earlier this week, the International Monetary Fund (IMF) reduced its forecasts for UK growth to 1.4% in 2008 and 1.1% in 2009, down from the 1.75% that had been projected for both of these years.

The IMF report also suggested that the Bank of England has little opportunity to improve the economic outlook by cutting the base rate.

Meanwhile, the UK services sector, which accounts for more than two-thirds of the economy, continues to give cause for concern.

According to the Chartered Institute of Purchasing & Supply, the Purchasing Managers’ Index (PMI) rose slightly to 47.4 in July, up from 47.1 in June.

The index is based on five indicators: new orders, inventory levels, production, supplier deliveries, and the employment environment.

While the July rise was not forecast by the City, generally speaking a PMI below 50 indicates that industry is contracting.