Interest rates held at record low of 0.5%

Rate setters at the central bank had to weigh the fact that consumer prices index (CPI) inflation reached 3.3% in November, with concerns that raising interest rates could tip the UK economy into a "double-dip recession".

The base rate was maintained at 0.5% following a two-day meeting by the Monetary Policy Committee. Interest rates have now been at the lowest possible level since March 2009.

Efforts to boost the money supply through the quantitative easing programme was also maintained at £200 billion.

The scheme sees the Bank of England create money electronically, which it then uses to buy up Government bonds and other financial assets.

The Bank's policy setters, who are tasked with keeping CPI at 2%, have admitted that inflation could rise to 4% in the spring but the rise would be temporary and fall back next year.

The feeble nature of the economic recovery means the Bank would rather brave above-target inflation than risk tipping the economy into a slump again.

Putting up interest rates might help reduce inflation but it would also restrict the spending power of homeowners with tracker mortgages and people repaying other debts, which would further endanger the recovery.

Consumers' spending power is being squeezed because pay packets are not keeping up with inflation.

There has been a barrage of bad news for cash-strapped consumers in recent weeks as petrol, gas and clothes all rose in price, and last week's VAT rise from 17.5% to 20% pushed up the cost of most goods and services.

Prime Minister David Cameron told the BBC this week that inflation was "concerning" and "well outside what the Bank is meant to deliver".

Monetary policy committee (MPC) member Andrew Sentance has repeatedly called for gradual interest rate rises to stave off the rising threat of inflation.

No two recessions are the same and one of the differentiating factors is that fewer businesses have failed as they have been kept afloat by low interest rates, time to pay arrangements being granted by HM Revenue & Customs giving extended periods to pay tax liabilities and the banks, although not lending, not taking an aggressive view as before on putting companies into administration to collect debts.

As we move from 2010 into 2011, we are seeing two of these factors disappear with the extended credit terms with HM Revenue & Customs being more difficult to agree and the banks starting to lose patience with businesses as their own balances sheets start to recover. The continued low interest rate is good news for business but it cannot last much longer as inflation must eventually be tackled so the outlook for 2011 remains tough.

For further information, contact:

Tim Stovold, partner at Kingston Smith LLP
Tel: 020 7566 3814
Email: tstovold@kingstonsmith.co.uk