Interest rate hike fears revealed

Risks that an interest rate increase might make the economic downturn 'unnecessarily deep' prompted the Bank of England's to keep rates on hold this month, it has been revealed.

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Minutes of this month's Monetary Policy Committee (MPC) meeting show that committee member Tim Besley voted to increase the cost of borrowing by 0.25% to 5.25%, making it the second month in a row he had argued for a rate hike.

But seven members chose to keep the rate steady at 5%, seeing it as the best policy to bring inflation back to its 2% target. The ninth committee member, David Blanchflower, voted for a rate cut.

According to the minutes, members were worried that an unexpected rate rise might adversely affect business and consumer confidence, causing inflation to undershoot its target over the medium term.

Although rates could be cut be later, the downturn would be "unnecessarily deep, adding to the volatility in the economy", the minutes said.

The majority of members believed that the main risk of an immediate rate cut was that it could suggest the committee was more concerned about sustaining output growth than about returning inflation to the 2% target.

Kevin Mountford, head of savings at moneysupermarket.com, said: "Despite rising inflation I think Bank rate will remain on hold for the foreseeable future, because of the weakness in the economy. That said savings rates are becoming increasingly divorced from Bank rate and savers continue to benefit from some exceptional deals as institutions battle for business. You can fix your savings for a year at 7.20% with ICICI Bank – 1.20 percentage points higher than the 5% Bank rate – and Kaupthing Edge has the leading easy access account at 6.55%."

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