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UK Interest Rates Held at 0.5%

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UK Interest Rates Held at 0.5%

It is interest rate decision day at the Bank of England (BoE) as the Monetary Policy Committee (MPC) completes it’s regular monthly meeting. No surprises today though as the Bank decide to leave the base interest rate unchanged at 0.5% and to continue the Asset Purchase Facility at 375Bn pounds.

As Britain is officially declared the fastest recovering developed economy, the Chancellor, George Osbourne, is preparing to address the IMF to explain how it was done. He will no doubt attempt to focus the discussion on the multitude of positives emanating from the fast paced UK recovery however there will also be some more problematic areas that will also require addressing. Three challenges in particular require tackling before the Chancellor can claim full marks.

Britain is running a record current account deficit that unless stemmed will continue to push the Debt/GDP limit. This is already on the high side of developed economy averages and will prove to be a problem down the road if not addressed.

Secondly, Britain’s recovery is largely being fueled by consumer activity, confidence in the economy is so high that Britons are running down their savings to make large ticket purchases. There is no problem with this per se as the expected growth will become a self fulfilled prophecy, but only if everything stays on course, any shocks to an economy exposed such as this could prove significantly detrimental.

Finally, the asymmetric regional nature of the recovery is leaving parts of the UK behind, the Chancellor will need to expand on how growth will be encouraged in areas such as the North in particular without risking overheating the affluent south east.
Notwithstanding these challenges, the British recovery is undoubtedly the star of the show among developed economies. It comes as no great shock then that the British Pound is once again challenging multi year highs at $1.68.

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