The UK’s interest rates which are set by the Bank of England’s Monetary Policy Committee (MPC) are to remain at a record low of 0.5%. The stagnant rate has largely been caused by the slowing recovery of the UK economy.
Information which has come from the National Institute for Economic and Social Research has indicated that the growth in the UK’s economy for the second quarter of the year was slower than the 0.5% growth shown in the first quarter of the year.
The first official estimate for the growth of the UK’s gross domestic product (GDP) in the second quarter of the year are due at the end of July. Other estimates had previously suggested that the growth may be 0.3%, but the findings from the National Institute for Economic and Social Research suggest that it may only be 0.1%.
The current annual rate of inflation for the UK is 4.5%, a full 2% above the target that has been set by the Bank of England. However, the MPC is undecided over which problem is the worse: the weak economy or the level of inflation, which is having a detrimental impact on spending power.
Whilst the UK’s interest rate is currently being held at 0.5%, some members of the MPC would have preferred to see a rise in interest rates in order to prevent the possibility of an acceleration in the level of inflation.
The current levels of inflation and the low interest rates is also having a detrimental impact on savings. The Save our Savers lobby group has recently suggested that the current situation may have reduced the value of UK savings by a total of over £50 billion over the course of the last year.
Other members of the MPC believe that the government cutbacks and tax increases will have an impact on inflation. This may cause consumers to have a lower spending power. They also believe that energy prices will naturally begin to fall. This situation could then lead to lower levels of inflation.
However, recent details released by energy companies suggest that the cost of gas and electricity is expected to increase in August and high energy prices are considered to be a large part of the inflation problem.
David Kern, the chief economist of the British Chambers of Commerce, believes that if the MPC were to tighten their policy in reaction to the the higher utility prices and internationally generated inflation, it would be a mistake. He is backing the decision not to increase interest rates, adding: “Premature rate increases, at a time when the government is tightening fiscal policy through its deficit-cutting programme, could damage jobs and growth and should be avoided.”
