Growth prospects remain uncertain, says Bank

19 August 2010

Minutes from the latest meeting of the Bank of England's rate-setting Monetary Policy Committee suggest that concerns persist about the UK economy's ability to build up a head of steam in the recovery.

Although the second quarter of the year saw a 1.1 per cent jump in growth, the Bank identified risks of a slowing down following the emergency Budget.

The minutes noted: "Some of the softening in sentiment in the household and business surveys had followed the June budget. This had been in contrast to generally improved sentiment in financial markets.

"Some firms might be worried about their exposure to public sector spending directly, and also via the second-round effect on consumption arising from public sector job losses."

The MPC voted to keep interest rates on hold at 0.5 per cent despite inflation remaining stubbornly high.

Members of the committee are judging that the sluggishness of the economy will eventually pull inflation back down towards its 2 per cent target.

Even so, the minutes conceded that the cost of living may remain higher than predicted and indicated the Bank's willingness to act if required.

The risks, both on inflation and growth, were described as substantial by the minutes, but that "members stood ready to respond in either direction [on interest rates] as the balance of risks evolve".

However, the likelihood is that, with growth uncertain, the Bank will keep interest rates low for the foreseeable future in the hope that the lost cost of borrowing will encourage business and consumer spending.

The bank decided to leave the £200 billion quantitative easing programme unchanged.

On balance, the MPC believes that "the considerable stimulus from monetary policy, together with a further expansion in world demand and the past depreciation of sterling, should sustain the recovery".