Bank Rates Stay on Hold in Europe

By: Dr. Mike Campbell

The policy of offering cheap money remains in force within the Eurozone and the United Kingdom. The Bank of England’s Monetary Policy Committee decided that UK rates should be held at 0.5% for the sixteenth consecutive month and decided against injecting further funds into the UK economy through the process known as Quantitative Easing. Whilst the decision had been widely expected, there have been growing suggestions that UK interest rates would need to rise sooner rather than later as a mechanism to rein in inflation. The Consumer Price Index which measures inflation within the UK economy retreated from a level of 3.7% in May to 3.4% last month. Whilst this is not high in absolute terms, it is significantly above the UK target for inflation which is set to 2%. The May inflation figure was the highest level seen for 17 months in the UK economy. It is sure that there will be increased inflationary pressure next year as a result of the UK government’s decision to raise VAT (a purchase tax) from 17.5 to 20% in early January. The move is being made to help redress the UK public spending deficit.

Meanwhile, the European Central Bank has maintained its 1% interest rate policy for the 14^th straight month. Again, the purpose is to allow cheap money to be available to business to help to stimulate economic growth. ECB President, Jean-Claude Trichet said that the bank anticipated that growth within the Eurozone to be moderate and patchy against a backdrop of continued uncertainty, contributed to, no doubt, in no small measure by the on-going sovereign debt crisis. He commented that inflation within the zone was contained and he was confident that it would remain close to or below the target figure of 2%.