A meeting held by the Bank of England’s Monetary Policy Committee (MPC) earlier this month resulted in the verdict that interest rates should not be increased despite the likelihood that inflation will continue to rise to 5% up from 4.5%, well above the initial hopes of a maximum of 2%.
The meeting was called by the MPC in order to consider its options for how best to help the UK’s struggling economy. The committee acknowledged the biggest economic problems that have risen, such as decreased consumer demand and consequently dwindling retail sales; the slowing of the housing market and a reduction in exports and output, and deliberated on how best to address these issues.
Quantitative Easing was considered as a possible solution. However, it was decided by a vote that this measure is not appropriate just yet. Adam Posen was the only member to vote in favour of introducing Quantitative Easing now. Over the past few months, Posen has maintained that rising inflation does not impose as much threat to the economy as weak growth and therefore the Quantitative Easing programme should be expanded to incorporate a further £50bn for economic stabilisation. Recently, there has been conjecture as to whether the continuing uncertainty over the economy will cause other MPC members to endorse his opinion.
The chief UK and European economist at IHS Global Insight, Howard Archer, has further confirmed the speculations with his prediction that the MPC will go ahead with the increase of £50Bn by the end of 2011. He expressed his doubt that interest rates will be increased either this year or next year but confirmed that it is likely the Bank of England will introduce Quantitative Easing in the near future.
The MPC also recognized that it could do more to support the economy, an admission that was well received by businesses. David Kern, chief economist at the British Chambers of Commerce highlighted that although the decision to implement Quantitative Easing remained unchanged, there was definitely a sense that the MPC is in preparation to increase the programme.
Yesterday, the International Monetary Fund lowered its expectations for economic growth in the UK this year by 0.5%.
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