The Bank of England (BoE) has announced that the interest rate will remain unchanged at 0.5%, alongside the level of quantitative easing holding at £200bn.
With a new Budget due in a little less than two weeks, the BoE is expected to remain on the sidelines. It is likely to wait and see what impact the fiscal tightening has on the economy before revising its latest projections.
Duncan Higgins, senior analyst at Caxton FX, said: “With spending cuts and tax rises just around the corner we are unlikely to see a change in interest rates this year. The fear is that the measures the government is due to implement could destabilise the recovery and raising rates prematurely would exacerbate the problem.”
In the past few months pressure has been building that the rising level of inflation would force the BoE to intervene and raise rates, but these pressures are easing.
“The Bank has stubbornly stuck to its line that inflation will fall below the 2.0% target in the medium term, despite growing dissent. Increasingly, factors do point to inflation subsiding. Troubles in the eurozone are showing little sign of easing and falling demand from the continent will put downward pressure on prices. This will be compounded by weaker domestic demand as the full impact of tax increases and spending cuts is felt,” said Higgins.
The markets have shown little reaction to the BoE’s decision and sterling is continuing to steadily appreciate.
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