Money Story

09 January 2009 22:00 BST

Bank opts to hold rates again

The Bank of England has held interest rates in the UK economy at five per cent as had been widely predicted.

This is the fifth consecutive month the monetary policy committee (MPC) has left the rate unchanged, following a 0.25 per cent cut in April.

The MPC appears unwilling to bow to pressure for a rate cut to boost the economy while inflation remains well above target. The consumer price index (CPI) is presently at 4.4 per cent, ahead of the government's target of two per cent.

However, falling house prices – with Halifax today reporting the steepest drop in prices since 1983 – and a slowing economy have increased the pressure on the Bank to cut rates, offering a boost to the faltering economy.

The Office for National Statistics (ONS) reports growth in the UK economy was stagnant during the second quarter of the year, suggesting the country could be sliding toward recession.

Indeed the Organisation for Economic Co-operation and Development (OECD) speculated earlier this the UK economy will contract in the current quarter and the next - meeting the official definition of a recession.

Chancellor Alistair Darling has also added to gathering clouds, suggesting the present economic conditions are "arguably the worst in 60 years".

Despite today's decision, there is a widespread expectation the Bank will cut rates before the end of the year. At least one member of the MPC, David Blanchflower has repeatedly called for cuts, arguing action must be taken to stave of recession.

Oil prices have also been falling back toward $100 a barrel in recent days, easing inflationary pressure in the mid-term.

"It now seems a question of when, rather than will, the Bank of England cut rates," argues Howard Archer, chief economist at Global Insight.

"The MPC has clearly become markedly more concerned about the current state of the economy and the growth outlook in recent weeks, acknowledging that recession is very possible."