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Economy: Bank of England leaves interest rates on hold

12:10 10 April 2014

The Bank of England.

The Bank of England.

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Interest rates were left on hold again today after Bank of England policymakers decided it was too early in the UK’s recovery to scale back stimulus efforts.

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Most economists think the bank’s monetary policy committee (MPC) will not lift interest rates from 0.5%, where they have been since 2009, until next year.

Investec chief economist Philip Shaw said: “With the economy growing respectably but not roaring away, we see it likelier than not that the MPC will avoid tightening policy this year, especially with inflation expected to remain below target over the medium term.”

The Consumer Prices Index (CPI) rate of inflation is currently at 1.7%, below the bank’s 2% target and giving the MPC leeway to leave rates on hold.

This month’s meeting of the MPC was shorter than usual to allow some members to leave last night for International Monetary Fund (IMF) meetings in Washington.

According to the IMF, the UK is set to be the world’s fastest-growing major advanced economy this year, with GDP expected to increase by 2.9%.

The IMF’s latest World Economic Outlook gave its backing to policies pursued by Chancellor George Osborne and Bank of England governor Mark Carney but warned over the risk posed by surging house prices.

GDP remains below its pre-recession level six years ago and latest monthly survey figures from the three main sectors of the economy show why the MPC remains cautious over the state of the recovery.

They revealed that while construction, manufacturing and services were all continuing to grow robustly in March, the pace of expansion had slackened off, indicating that the recovery had slowed to its weakest pace in nine months.

The Bank previously pledged not to lift rates until a fall in unemployment to 7% although that “forward guidance” policy has now been abandoned after joblessness declined more quickly than had been expected as growth picked up speed last year.

Rate-setters are now using a new “fuzzy” guidance linking monetary policy to a more opaque measure of how far the economy is running below its capacity. They have indicated that more sustainable growth is needed before any hike.

Howard Archer of IHS Global Insight said: “The MPC is not taking sustained recovery for granted and very much wants to see it become more balanced, with business investment seeing sustained improvement and exports increasingly kicking in.

“There are some signs that the UK economy may recently have lost a little momentum, although it still appears to be growing at a healthy clip.”

Last week, Mr Carney refused to rule out a pre-election rise in interest rates, but stressed that any rise would be gradual.

He added that despite unemployment falling more quickly than expected, there remained “slack” in the labour market “right across the country”, more of which needed to be used up before any hike.

Mr Carney told a newspaper the recovery in the economy had been “uneven” and needed to be seen across the country.

Martin Weale, a fellow member of the MPC, has previously indicated that a rise in the cost of borrowing was likely next spring, and appeared to suggest it would come before the May general election.

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