Yesterday, Mervyn King, the Governor of the Bank of England, suggested that the bank base rate will likely stay at its current all-time low, of 0.5%, for the foreseeable future.
In a speech to the Treasury Committee Mervyn King said that the recent economic data, from the National Office of Statistics, showing larger than expected growth of 1.1% for the second quarter was ‘’encouraging’’.
However he went on to say that ‘’we must be careful not to read too much into one number,….and the wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment here in the UK will be sustained."
He suggested that the Bank of England still had the option of loosening monetary policy despite the fact that inflation remains well above the government’s target rate. The Consumer Price Index (CPI) is the official measure used to track inflation (the general increase in the price of goods and services we use) and the government’s target rate is 2%. Currently the CPI stands at 3.2%.
Mervyn King stated that "given the changes to VAT announced in the Budget, it's likely that inflation will remain above target for much of next year… [but] the debate is about the appropriate degree of stimulus, not about applying the brakes.’’
In a clear indication yet that interest rates are not going anywhere in a hurry Mr King said that there is "considerable distance to be travelled" before the world "normal" could be applied to UK monetary policy again.