Interest Rates Kept At Rock Bottom - Why?

Since 1694, the Bank of England has regularly set Interest Rates as a method of controlling the British Economy onto further and sustained growth. Today, however, the Bank decided to hold the base rate at 0.5%, which prior to March 2009 had never been set as the official base rate, for it was considered too low!

However, we must remember that these are precarious times, which call for strong stimulus. Or, is it true that 2009 was a precarious time, and now  we are witnessing a strengthening of the economic recovery, and have a need for less potent monetary policy?

Well, there is no doubt that many concerns about the UK's short-medium term future do exist. The US economy is stuttering, a factor in the UK's trade gap widening - to 8.7 billion pounds from the 7.5 billion pounds in the previous month, with a 0.9% decrease in exports, unexpected against a depreciating pound - raising fears over the Government's idealistic export-led recovery. The Government is set to embark on a rampage of spending cuts, causing job losses in the short-term, and less investment in the long-term. Many European countries are still only staggering away from the brink of collapse. Add to this a growing business pessimism, particularly in the manufacturing industry, as Inventory purchasing slides, showing low future business confidence, and the picture isn't rosy. Which makes the Bank's decision seem extremely obvious.

Which it may well be. However, there are still some strong arguments as to why Interest Rates should now be increased. Inflation - which the Bank of England is obliged to try and restrain towards 2% has been above 2% every month in 2010 so far, when measured by both CPI and RPI according to the Office for National Statistics. Inflation will decrease the value of assets, may cause a price-wage spiral to begin (although this is not appearing to happen at the moment due to the high amount of supply available in the Labour Market), and cause a decrease in the UK's competitiveness.

However, the majority of the issues caused by inflation are minor in comparison with the catastrophe a slump in growth could signal in the long term future of the UK.

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