Middle East troubles have raised interest rate stakes, says KPMG
The Bank of England has held interest rates at an historic low of 0.5 per cent, despite recent voting evidence showing an increase in the number of policymakers backing a hike. Ian Borley, senior partner of KPMG in Leicester, said that the ‘Middle East wild card’ had intensified the committee’s interest rate dilemma.
The nine-strong Monetary Policy Committee (MPC) made the decision to maintain the rate. The last change was on 5 March 2009 when the committee lowered the rate by 0.5 percentage points to 0.5 per cent.
Borley said: “Interest rates have been held as expected this month, but the Middle-East wild card intensifies the committee’s interest rate dilemma – and raises the stakes.
“Rising oil prices are both inflationary – directly pushing up the price of fuels, transport costs and so on – and demand deflationary as they leave consumers with less to spend on other things.
“So higher oil prices push up the headline inflation rate in the short-term but, provided wages are not bid up in response, weaken growth in the longer-term. Indeed, a big enough sustained rise in the oil price could tip the economy back into recession.
“No-one knows how high the oil price will go, or how long it will stay there, so how should policy react? Until it becomes clearer whether the MPC is dealing with an inflation problem or a growth problem – or both - the best thing it can do is sit on its hands and do precisely nothing.”
The MPC also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200bn.
