21st January 2015
Interest rates may remain at their record low of 0.5% throughout this year and next, an investment expert has forecast following Bank of England Monetary Policy Committee minutes which revealed that members voted unanimously to keep rates on hold.
The two dissenting voices on the MPC have now come back into line with the rest of committee and no longer want to see a base rate rise in the short term, the latest MPC minutes reveal.
The minutes, published this week show that Martin Weale and Ian McCafferty have abandoned the push for a rate rise given the low level of inflation. Both have been voting for an increase to 0.75% since April.
Nick Dixon, investment director at Aegon, said: “The collapse in commodity prices, a cloudy global economic outlook, and ceiling on wage growth are collectively limiting price growth. There may not even be a rate hike until after an EU referendum in 2017, unless the government wants to reduce the UK’s 2% inflation target. Be prepared for a more dovish MPC this year than we expected in 2014”.
Today also brought news that the unemployment rate dropped below 6% for the first time in six years and wages rose by more than prices in November.
Hargreaves Lansdown senior economist Ben Brettell, said: “This marks a significant shift in the expected path for interest rates. Many forecasters had been expecting the first rise to come later this year, but this now looks extremely unlikely. This further reinforces my view that they will remain on hold throughout this year and into 2016. The effect of lower oil prices, plus the ongoing supermarket price war, could keep inflation below 1% for a number of months. It is almost impossible to see the MPC voting for higher rates while Mr Carney is penning regular letters to George Osborne.”
The news has seen sterling fall. Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX says: “Sterling fell by over half of a percentage point following an unexpected change in the voting by the nine members of the monetary policy committee. With the two dissenters who had been voting for a rate increase of 0.25% now deciding that it is no longer appropriate, at a time when we have a joint record low rate of inflation and near-terms risks that it will fall further. This simply aligns all of the MPC with what markets have been pricing in for a while – that UK borrowing costs are unlikely to be increased this year. The overall tone of the minutes were quite upbeat about the economic outlook for the UK and the environment of very low inflation and near zero interest rates should continue to support GDP growth.”