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Economy: Bank of England leaves interest rate on hold again

12:03 06 February 2014

The Bank of England in the City of London.

The Bank of England in the City of London.

The Bank of England marked five continuous years of interest rates at their historic low of 0.5% today as it again decided to leave them unchanged.

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It is the 60th monthly meeting in succession that rate-setters on the bank’s Monetary Policy Committee (MPC) have set the rate at that level.

Rates were slashed to 0.5% in March 2009 amid the depths of the economic downturn and have stayed there ever since as monetary policy remains on what is described as “emergency setting”.

The £375bn programme of quantitative easing to pump money into the economy was also held at the same level today, with the UK’s gross domestic product still below the level it was six years ago despite improving growth during 2013.

Today’s meeting sets the scene for what economists expect will be the demise of the bank’s flagship forward guidance policy, which pledges no rate hike will be considered until unemployment has fallen to 7%.

This month’s MPC meeting is expected to be the last under the auspices of the guidance in its current form, before it is tweaked next week.

Bank governor Mark Carney has indicated that a “range of options” on how to adjust the pledge will be set out in its quarterly inflation report.

It comes as the jobless rate falls more quickly towards the 7% target than policy makers had first expected when they set the guidance in August, leading some analysts to bring forward expectations of a rate hike as early as this year.

Minutes of the MPC’s last meeting in January revealed members of the nine-strong committee saw “no immediate need to raise rates” regardless of unemployment dropping to 7.1%, a whisker away from the forward guidance threshold.

A fall in inflation to the bank’s 2% target and a slight slowing in the rate of growth in the last quarter will have bolstered the argument to continue monetary stimulus.

Mr Carney told business leaders in Davos last month that the recovery had “some way to run” before a hike in rates from the current level of 0.5% could be considered.

He also spoke of the need to “evolve” forward guidance to changing circumstances, beginning at the inflation report next Wednesday.

Today’s rate-setting meeting, expected to be the last under the guidance, was only the sixth since it was unveiled by the Bank in August.

Jonathan Loynes of Capital Economics said: “The MPC’s decision to leave policy on hold today was almost certainly the last to be taken under the unemployment-focused forward guidance adopted just six months ago.

“But whatever replaces it, interest rates are likely to remain at very low levels for a long time yet. One option is simply to switch the focus to a different variable, such as wages growth or nominal GDP.

“But the unemployment rate experience has proved the folly of relying on a single indicator to represent the overall state of the economy.”

Howard Archer of IHS Global Insight said: “The February MPC meeting was always going to be essentially a holding operation before the Bank of England unveils some modifications to its forward guidance policy.

“However the Bank of England fine tunes its forward guidance, we believe the odds still strongly favour the Bank of England holding off from an interest rate hike in 2014.

“We anticipate that the Bank of England will want to give the economy as much chance as possible to establish broad-based growth and will hold off from immediately raising interest rates for some considerable time.”

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