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MPC holds base rates in light of inflation fears

The Bank of England held off on any changes to monetary policy at its last meeting, after suggestions that the economy could avoid recession in the first half of the year.

Last week the Monetary Policy Committee (MPC) voted to maintain its quantitative easing programme at £325 billion and keep the base rate at 0.5% for a 38th consecutive month.

Howard Archer, the chief UK and European economist at IHS Global Insight, says the MPC’s decision stems from heightened inflation concerns and “a belief that the economy is seeing underlying modest growth despite the reported first-quarter GDP contraction that put the economy back into recession”.

Last month, preliminary figures from the Office for National Statistics (ONS) showed the economy as shrinking by 0.2% in the first quarter, meaning the country is in technical recession after previously witnessing a 0.3% contraction.

The recent fall in GDP was largely attributed to a 3% drop in construction output. However, a number of economists told Fund Strategy that this is at odds with the quarter’s business activity surveys and could be the result of the ONS using incomplete construction data when making its first estimate.

The Bank’s own research suggested the fall in construction activity would be lower than the ONS’ estimate. As the minutes of the MPC’s April meeting say: “The committee’s judgement was that, abstracting from both the puzzling weakness in measured construction output and the impact of one-off factors, the economy appeared likely to be expanding, albeit only modestly, in the first half of the year.”

Furthermore, the OECD says the leading indictor for the British economy reached a “turning point” in March after edging up for the third month running. This suggests underlying growth in the first quarter, despite the ONS’ preliminary assessment of the economy.

But the latest figures from the ONS show construction output dropped by 4.8% in the first quarter, rather than the 3% previously estimated.

This makes it likely that the quarter’s GDP will be revised down by another 10 basis points to show a contraction of 0.3%.

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