Monetary Policy Committee meets to decide on Bank of England base rate tomorrow - 3rd Sep 2008

Bank of England's  Monetary Policy Committee meets tomorrow to set the UK interest rate for the next 4 weeks. Are they going to raise the rate, keep it at the same level or make a modest reduction to help the struggling British economy?

As usual, there is speculation regarding the outcome and if it is going to be reduced or left unchanged at 5 % and so called experts are divided on the issue.

The speculation is fuelled by the 3 way split amongst MPC (Monetary Policy Committee) members. The recent minutes released have revealed that members are split between raising the rate, keeping it at the same level and reducing it.

The recent events like warnings about UK going into recession over the next few months, output grounding to a halt, declining consumer confidence, tumbling house prices and recent decline in oil prices give hope that MPC might cut the rate.

On the other hand, the UK inflation has risen to 4.4 % recently, and as MPC’s primary remit is to control inflation. They might decide to keep the rate at the same level or to raise it.

Household bills in UK have risen lately due to increased mortgage rates, increase in fuel and energy prices and increase in food prices. This is coupled with below inflation pay rises and has forced millions of people to reduce their non essential spending so that they can afford to pay the extra cost for daily essentials. This has added to the inflationary pressures and even if the interest rate is increased, people will have to find money to buy the essential items at increased prices and the interest rate rise might not have any effect on inflation.

Recent reports in the media about “impending recession” , followed by conflicting reports by HM government ministers have added to the gloom felt by consumers. At one point Prime Minister Gordon Brown tried to reassure the country by telling the nation that although these are tough times, UK is equipped to “ride the storm”. That was contradicted by the Chancellor of the Exchequer Alistair Darling a few days ago, when he told the Guardian that current situation is going to be worse than the days of food rationing.

Some experts are predicting that the interest rate will fall from next month onwards and could be as low as 3.5 % in 2009.