Bank set to leave rates on hold


Published: Sunday 5th April 2015 by The News Editor

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The Bank of England looks set to leave interest rates on hold on Thursday when officials meet to set policy for the last time before the General Election.

Expectations of a hike have been pushed back into next year with Consumer Price Index (CPI) inflation currently at zero and predicted to turn negative.

Uncertainty ahead of next month’s poll may also weigh on rate-setters’ minds as well as concerns about the wider economy despite latest figures showing growth of 2.8% last year, better than previously thought.

Official data for the start of 2015 has looked less rosy with all three main sectors of the economy – including the powerhouse services sector which represents three-quarters of output – going backwards in January.

Bank of England chief economist Andy Haldane has even suggested that a rate cut is as likely as a rise, though subsequent remarks from the other members of the nine-strong Monetary Policy Committee (MPC) indicate he is in the minority.

The MPC has made clear that rates could be cut should low CPI persist longer than expected but a number of policymakers have stressed that they still see the next move as a rise.

Rates have been held at 0.5% for six years since the height of the financial crisis and the recovery has spurred speculation about when a first hike will come.

But policymakers, who are typically faced with the prospect of having to lift rates to keep inflation down, now look as though they will need to keep them low for longer to ward off the threat of a damaging spiral of low or negative CPI.

Low inflation, driven by temporary factors such as the slide in oil prices, is for the moment seen as broadly positive by politicians and officials, because it gives consumers more spending power to boost the economy.

Retail sales figures for February showed a steeper than expected rise of 0.7% as shoppers appeared to be spending the windfall from lower food and petrol prices.

But there is a fear that if negative inflation becomes entrenched, consumers could delay spending and firms put off investment.

In addition, servicing repayments on debts such as mortgages would become more expensive in real terms, especially if wages fall.

Bank of England governor Mark Carney has described the threat of this as a “clear and present danger” to the UK’s debt-laden households and businesses.

Vicky Redwood, chief UK economist at consultancy Capital Economics, said: “We think that the deflation likely to be seen in the coming months will be of the ‘good’ sort, lasting only a short while and boosting households’ spending power.

“So we doubt that a rate cut – as floated by MPC member Andy Haldane – will be seen.

“That said, a rate rise seems unlikely until the Committee is sure that deflation is not becoming entrenched, which may take several months.”

Howard Archer, chief UK and European economist at IHS Global Insight, said the MPC would “undoubtedly” leave rates on hold on Thursday and strongly backed the view the next move would be up.

But he added: “Any interest rate hike could be delayed if there is prolonged political uncertainty after May’s general election and this has a dampening impact on economic activity, particularly business investment.”

Published: Sunday 5th April 2015 by The News Editor

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