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By Lee Wild

Date: Thursday 10 Jul 2008

LONDON (ShareCast) - UK interest rates remain at 5% today after the Bank of England decided the threat of recession is currently too great to start tackling soaring inflation with higher borrowing costs.

Many had expected the nine-member Monetary Policy Committee (MPC) to start lifting rates, which have now remained unchanged for three months, as the cost of living continues to spiral.

The Bank’s governor Mervyn King was forced to write to chancellor Alistair Darling last month to explain why inflation had risen to 3.3%, way above its 2% target.

Sky high petrol prices and increases in food and utility bills were blamed, with King also warning that rising prices and the weak pound will take inflation above 4% in the second half of 2008.

He said the MPC is prepared to take “whatever action is needed" to get inflation back to its 2% target, fuelling speculation that borrowing costs will rise this year.

A 7% surge in food prices in June, announced yesterday by the British Retail Consortium, sent annual shop price inflation to 2.5%.

But the central bank will also have had to ponder Tuesday’s report from the British Chambers of Commerce, which referred to Britain's economic situation as "grim” and “ominous".

"There is a real risk of recession in the coming months,” said BCC Director General David Frost. “This is deeply worrying and not just for business but for the consumer too, with both manufacturing and services reporting negative results.”

“If these trends continue the UK business sector is now only one quarter away from technical recession.”

A swathe of job losses across the housebuilding sector, announced this week, may also have unsettled rate setters.

Hard-hit Barratt Developments became the latest to swing the axe, cutting 1,200 staff today on top of the 1,100 to go at Persimmon and the 40% cut in numbers at both Bovis Homes and Redrow.

House prices tumbling at their fastest annual rate for 16 years and the soaring cost of borrowing, up to 6.63% for a 2-year fixed rate mortgage, has slashed demand for new homes.

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