The Bank of England is unlikely to raise interest rates 'near-term' after a series of economic data show that the MPC (Monetary Policy Committee) - the eight wise-men in charge of setting policy - are more likely to adopt a 'wait and see' approach to ensure stability in the economic recovery.
KING AND THE MPC
Mervyn King and the rest of the Monetary Policy Committee are charged with a remit of protecting the economy from inflation and next meet 10th August to decide the direction of the Central Bank's rate setting and quantitative easing schemes.
Having stood before the Treasury Select Committee, King knows that in order to keep inflation low, the economy will need to grow:
"We continue to face the challenge of rebalancing our economy away from consumption towards net exports, and raising our national savings rate. But there are also risks on the upside." said King to the Members of Parliament yesterday.
"CPI inflation is currently above target at 3.2 per cent, and it has been high for much of the past four years." he added.
"The MPC faces a difficult challenge in balancing those risks. To do so, we judge that at present it is right to keep our foot firmly on the accelerator in order to stimulate the economy. As you would expect, there is a debate about quite how hard we should be pressing on the accelerator." he said.
TO RAISE OR NOT TO RAISE
The question to which he refers, Mervyn King, Governor of the Bank of England is whether to raise interest rates - ie. push the accelerator - or keep it low relying on spare economic growth in the recovery to pull us out via exports or other.
Pushing the accelerator, and raising interest rates would potentially throw thousands of mortgage owners out of their homes, raising the likelihood of 'double-dip' recession as thousands move into 'negative' equity where the mortgage they took on their homes which is tied to the BoE's interest rates becomes more expensive than their houses value.
The Bank - well aware of this - is balancing the needs of inflation and tight credit conditions which it says is 'halting the recovery'.
"Overall M4 lending (excluding the effects of securitisations) fell by 0.3% in June, the second monthly drop in a row." said Vicky Redwood of Capital Economics today after the Bank of England's favoured measure of monetary supply edged up 0.2 pct month-on-month in June.
"The Government this week released a consultation paper on how to improve finance for firms. But there is no silver bullet. We still expect lending growth to remain weak, undermining the economic recovery."
"It is evident that the ongoing fall in bank lending to companies is being influenced significantly by low corporate demand for credit in addition to restricted supply. Nevertheless, the Bank of England data do little to alleviate concerns that ongoing tight credit conditions remain a serious handicap to growth and it is a particular problem for smaller companies.
"This bolsters the case for the Bank of England to revive its Quantitative Easing programme should the recovery show serious signs of faltering over the coming months. Potentially significantly, the Bank of England's Monetary Policy Committee discussed the "arguments in favour of a modest easing in the stance of monetary policy" at their July meeting, although the case for any near-term action has seemingly been diluted by the news that GDP grew 1.1% quarter-on-quarter in the second quarter." added IHS Global Insight Chief Economist, Howard Archer.