Bank of England holds base rate at 0.5% for the 65th consecutive month

10th July 2014

img

The Bank of England has kept UK interest rates at a record low of 0.5% for the 65th month in a row.

The consensus prediction was that the Bank’s Monetary Policy Committee was going to leave the base rate at its historic low this month but there is still considerable doubt as to whether its first hike will occur in late-2014 or early-2015.

Ben Brettell, senior economist at fund broker Hargreaves Lansdown said: “Second-guessing the actions of central bankers seems to have become a national pastime. While today’s no-change decision comes as no surprise, the minutes of this week’s meeting, due to be released on the 23 of July, will be scrutinised for clues as to when UK interest rates might eventually rise.”

The devil is indeed in the detail and if any members of the Monetary Policy Committee voted for higher rates, the market could take this as a signal that a hike is penciled in for later this year.

Howard Archer, chief UK and European economist at IHS Global Insight believes there will undoubtedly be many swings in interest rate expectations over the coming weeks and months.

Bank of England governor Mark Carney

Bank of England governor Mark Carney

He said: “With the economy currently sustaining healthy momentum overall and the unemployment rate coming down markedly, we believe that the first interest rate hike from 0.50% to 0.75% is more likely than not to come in late-2014, although it is far from a done deal and could yet be delayed until the early months of 2015.”

Bank of England boss Mark Carney has stressed that the decision on when to start increasing rates is not pre-set and will be data driven, and while most of the latest news on the economy has been robust, a marked relapse in manufacturing output in May, where it fell 1.3% month-on-month, highlights that ongoing strong growth cannot be taken for granted.

“Furthermore, below-target consumer price inflation (just 1.5% in May) gives the Bank of England leeway on when to act,” added Archer.

Brettell added that the private sector remains highly indebted and the impressive unemployment figures mask a number of underlying factors. He said: “Many of the jobs being created are among the self-employed – workers who can effectively price themselves into a job. Furthermore a high proportion of part time workers are seeking full time work.

“It seems fair to assume that a significant degree of slack in the labour market remains, and I believe the Bank of England will want to see hard evidence that this slack has been absorbed before considering higher interest rates.”

Expectations that the Bank of England would start to edge up interest rates before the end of 2014 were fuelled by Carney warning in his key Mansion House speech in mid-June that a rise in interest rates “could happen sooner than markets currently expect”.  At the time, the markets were largely pricing in a first interest rate rise in spring 2015. While stressing that future interest rate rises would be gradual and limited, Mr. Carney also remarked that “the start of that journey is coming nearer.”

However, Mr. Carney then seemed to ease back on this message when he and other MPC members testified to parliament’s Treasury Select Committee later on in June. Archer noted: “Specifically, Mr. Carney observed that the recent very low earnings growth data could be a sign that there was more slack in the labour market than the MPC had previously thought; although he balanced this observation by noting that the economy currently looks to have more momentum than had been expected.”

Even if the Bank of England does start edging interest rates up before the end of 2014, Archer still expects them to only reach 1.25% by the end of 2015, 2% by the end of 2016 and 3% by the end of 2017.

He said: “The Bank of England is favouring an eventual gradual and limited tightening of monetary policy partly because it is unsure how the economy will react to rising interest rates following the serious downturn it suffered and given high debt levels. The strength of sterling is another factor that warrants Bank of England caution over the pace at which interest rates rise and how high they go. Sterling has traded at a near six-year high on its trade-weighted index in July.”

When rates do start to rise, they will do so slowly, in small increments, and they will eventually stabilise at much lower levels than witnessed pre-crisis noted Bretell, adding: “This means that, provided the economy is strong enough, we can expect rates of 2-3% in three to five years’ time.”

 

Leave a Reply

Your email address will not be published. Required fields are marked *