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Economy: Interest rates to complete fifth year at record low of 0.5%

06:00 06 February 2014

The Governor of the Bank of England, Mark Carney.

The Governor of the Bank of England, Mark Carney.

Interest rates are expected to remain unchanged today following a Bank of England meeting that looks set to mark five continuous years in which they have been at their current historic low.

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Economists say it will also set the scene for the demise of the bank’s flagship forward guidance policy which pledges no rate rise will be considered until unemployment has fallen to 7%.

It is expected to be the last monthly meeting of the nine-strong monetary policy committee (MPC) before an expected tweaking in the guidance 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.

Policy-makers see little reason to raise rates at the moment, with inflation at the Bank’s 2% target, and with a slight slowing in the rate of growth in the last quarter supporting arguments to continue monetary stimulus.

The bank’s £375billion programme of quantitative easing pumping money into the economy is also likely to remain on hold, with gross domestic product (GDP) still below the level it was six years ago despite last year’s acceleration in growth.

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

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.

The latest meeting looks set to be the 60th time since the rate was first fixed at that figure during the depths of the downturn in March 2009 that policy-makers have agreed on the same level.

But it will be only the sixth since the announcement on forward guidance in August formally linked the MPC’s considerations to the jobless figure.

Since then, unemployment has fallen more rapidly than the bank expected and its forecast for when it reaches the 7% threshold is likely to have to be brought forward again next week.

Mr Carney talked in his Davos speech of the need “to evolve guidance to changing circumstances”, beginning at the inflation report announcement.

Martin Beck, UK economist at Capital Economics, said: “With the unemployment rate likely to fall below 7% soon, February’s MPC meeting will set the scene for the demise of forward guidance, at least in its current form.”

But he said that in next week’s announcement, a cut in the guidance threshold from 7% to 6.5% looked unlikely, with the new policy focusing instead on a broader range of labour market indicators.

Some MPC members have suggested holding rates for longer in the absence of pay increases failing to exceed inflation.

Alan Clarke of Scotiabank suggests new guidance could commit the bank to sticking at 0.5% until the first quarter of 2015 subject to wage increases being no higher than 2%, coupled with existing caveats on inflation and threats to stability.

Howard Archer of IHS Global Insight said a slight slowing in growth in January indicated by economic surveys in the last few days would reinforce the bank wanting to keep the rate down possibly well into 2015.

He said: “The February MPC meeting is likely to essentially be a holding operation before the central bank unveils some modifications to its forward guidance policy when delivering its quarterly inflation report on February 12.”

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1 comment

  • I would just like to point out that it was Labour who got the interest down to this level !, before the tories start trying to claim all the honours !!, and that it was achieved despite the 'Bankers' crashing the economy !

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    freedomf

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