Bank expected to keep rates down

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Published: Thursday 5th March 2015 by The News Editor

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The Bank of England will mark six years of interest rates at the historic low of 0.5% today when it is widely expected to leave them on hold again.

They have remained at that level since March 2009 when policy makers took emergency action to stimulate the economy at the height of the financial crisis.

The recovery over the last couple of years has brought the prospect of a hike closer, but with inflation at a record low of 0.3% and expected to turn negative in coming months there seems little reason for one yet.

Even hawks on the Bank’s Monetary Policy Committee (MPC) who at the end of last year had been voting for a rise have abandoned their dissent to back the status quo at the last couple of monthly meetings.

Speculation is instead focused on whether the nine-member MPC will choose to hike rates later this year or wait until 2016.

Minutes of last month’s meeting showed signs of a three-way split with two members increasingly convinced there should be an increase in 2015 but one viewing a cut as just as likely.

Governor Mark Carney has raised the possibility of rates going down should low inflation persist for longer than expected – though he still expects the next move in Bank policy to be a rate rise.

Low inflation is seen as positive for the economy in the short term but policy makers will not want it to turn into a continuing and damaging spiral of falling prices with consumers putting off spending and firms delaying investment.

MPC members are likely to want to wait for the outcome of pay settlements this spring before deciding whether the threat of prolonged deflation has passed.

Uncertainty over developments in the eurozone economy is also likely to be a factor staying the hand of rate-setters considering a rise.

However, they must also look through the short-term impact of factors such as low oil prices to the prospect of inflation rising further down the track as the recovery drives up employment and wage growth – which the Bank sees accelerating this year.

Monthly economic data for February published this week added to hopes that the UK had started the year on the front foot although the pace of growth in the dominant sector edged back slightly.

That comes after Britain’s gross domestic product (GDP) grew by an estimated 2.6% last year, though it slowed more sharply than expected to 0.5% in the last three months

Martin Beck, senior economic adviser to the EY ITEM Club, said: “It is virtually certain that the MPC will chalk up a sixth successive year without changing bank rate when it announces its decision.

“However, the risks are increasingly becoming tilted towards an earlier first rate rise than we previously anticipated.”

Samuel Tombs of Capital Economics said the picture should be clearer by the summer, with the UK on course to avoid a damaging deflationary spiral.

He added: “If so, then we think that the Bank could move relatively quickly to voting to raise interest rates.”

Published: Thursday 5th March 2015 by The News Editor

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