UK rates on hold as Bank of England strikes delicate balance

Commenting on the decision by the Bank of England Monetary Policy Committee (MPC) to keep the UK base rate unchanged, Ted Scott, manager of the F&C UK Growth & Income Fund, commented: "The MPC's decision to leave rates unchanged was widely expected as they attempt to strike a delicate balance between the twin threats of higher inflation and slower growth, which are pulling interest rates demands in opposite directions.

"The MPC has a 2% target for inflation and previously warned that the rate is unlikely to fall below this figure for the foreseeable future. Commodity prices have moderated and oil has fallen by over 20% from its high, nevertheless they remain high by historic standards and food prices continue to rise. Hence, it is difficult for the MPC to lower rates and provide some solace for the consumer, who is also being hit by a rapidly deteriorating housing market. With little help from monetary policy, the Government is now being forced to look at other means to provide help for home owners, such as reducing stamp duty".

"My own view is that the slowing economy will eventually reduce inflationary pressures and therefore the next move in interest rates will be down but possibly not before the end of the year. The recent decline in commodity prices reflects concerns that the credit crunch and slowing economies in the West are beginning to have a negative impact on emerging market growth."

"The demand from fast growing emerging economies such as China and India has been the main reason for the steep rise in commodity prices - if they have now peaked, inflationary pressures should decrease and free the MPC's hand to provide a more accommodative monetary policy".