FXstreet.com (Barcelona) - Inflation has risen by a 2.5% year on year pace in March on the back of higher energy and import costs, and CPI is expected to rise faster for the next quarters, while household spending indicators are mixed and investment climate worsens, in this context, the bank of England considered to leave interest rates ion hold at 5%, as the best option to counterbalance conflicting risks on economy.
Food and energy prices have fuelled inflation to levels well above the 2.0% target, and, according to the Bank expectations, the worst, in inflation terms, is yet to come, as CPI is expected to Grow around 3% for the next quarters to return to 2% well into the year 2010.
At the same time, domestic demand has moderated substantially in the last quarter of 2007 as a result of a sharp slowdown in consumers' expenditure growth, logically, housing market activity has weakened with the subsequent decline in house prices. The outlook for the forthcoming months does snot seem much brighter, as higher inflation will weigh further into consumer spending, and credit conditions tightening will worsen things some more.
The Finantial markets turmoil remains present, according to the BoE, although recent liquidity injections by Central Banks seem to have eased the situation somewhat, nevertheless, banks are in need to reduce balance sheet exposures to risks, which will translate into further tightening of credit conditions.
In this context, the Bank, taking in account the perspectives of higher inflation on pone side, and sluggish output growth on the other, has considered to maintain rates at 5% as the best option to balance conflicting risks, and, specially to meet the target CPI over the medium term.