8th January 2015
The Bank of England kicked off the New Year by keeping interest rates stuck at their historic low of 0.5% for another month.
At its first meeting of 2015 the Bank’s Monetary Policy Committee (MPC) also held the size of its bond-buying programme at £375bn.
Given the current backdrop of low inflation, driven primarily by the declining price of oil, experts are not expecting the Bank to hike the cost of borrowing anytime soon. Official figures released last month showed that UK inflation fell to a 12-year low of 1% in November.
Interest rates have now been at 0.5% since March 2009.
As a result of the low cost of living environment, research group IHS Insight has pushed back its forecast of the first interest rate hike from 0.5% to 0.75% from August to November.
Howard Archer, chief UK and European economist at the firm said it would be “a major surprise” if the Bank raised interest rates before the final months of this year given the current disinflationary impact of very low oil prices and the risk that UK growth could be hampered by mounting political uncertainty ahead of May’s general election and problems in the Eurozone.
In addition, given that UK economic growth eased back to 0.7% in the three months to the end of September, from 0.8% in the previous quarter, there is little pressure on the Bank to raise rates anytime soon.
“While it currently looks more likely than not that interest rates will finally start to edge up in 2015, this is very far from a racing certainty. At most, there now looks likely to be just one 25 basis point interest rate hike to 0.75% in 2015,” added Archer. “And there is clearly a very real possibility that the Bank of England will delay acting until early 2016.”
Nick Dixon, investment director at Aegon, said: “Despite signs the UK economy is going from strength to strength, muted wage growth and declining commodity prices will join the chorus of economic forces silencing backers of an early rate rise. We may be seeing a key turning point in expectation, with a growing probability that the base rate won’t be changed until 2016. So there may be no need rush into a fixed rate mortgage just yet, as you may well get a better deal later this year.”
Archer presently expects interest rates to climb gradually to 1.5% by the end of 2016 and to 2.5% at the end of 2017. “This is based on the assumption that growth will hold up pretty well and that consumer price inflation will get back up to 2.0% around late-2016/early-2017,” he said.