Bank of England hold firm on interest rates

The Bank of England left rates on hold at 0.5% today for a 23rd consecutive month despite consumer price inflation rising at almost twice the pace of the Bank's 2% target.

They also left the asset purchase programme unchanged at £200bn. Sterling, which had gained broadly ahead of the announcement due to outside bets that rates could be increased, fell.  

Andy Scott, Foreign Exchange Dealer at HiFX comments: "I doubt many people will be surprised by there having been no change in the base rate given that only two members out of the nine on the MPC voted for a hike at January's meeting. It is also quite clear from the Governor's recent speech that he doesn't view interest rate hikes as having any real impact on the ‘temporary and external factors' that are driving up inflation in the short term. But pressure has been building from certain corners for the Bank to act now in raising rates or risk losing credibility on its inflation remit. UK CPI was at or above 3% throughout 2010 and is expected to increase further when figures for January are released next Tuesday.

"The Bank are taking a big gamble but they got it right in 2008 when they began cutting the base rate despite inflation being above 4% at the time. The recovery is still fragile and low interest rates are seen as a vital support for the economy. All eyes will likely now be on the inflation data next week which is followed on Wednesday by the Bank's Quarterly Inflation Report.

"Sterling's reaction was fairly muted but was toward its sessions low immediately after the announcement."