UK: Rates expected to stay at 0.5%

The Bank of England is expected to hold rates at 0.5%. The Bank of England is expected to hold rates at 0.5%.

Thursday, August 7, 2014
9:30 AM

Interest rates are expected to be held at 0.5% today though signs of economic improvement have fuelled speculation that some Bank of England policy makers are preparing to vote for a hike.

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The decision will be the first since gross domestic product (GDP) figures for the second quarter showed the UK had finally emerged from its worst downturn since the Second World War.

More recent survey data indicating strong growth in the dominant services sector have added to pressure for a rate rise - though a weaker performance for Britain’s beleaguered manufacturers have led to calls for caution.

The signs of improvement have led some experts to speculate that one or two members of the monetary policy committee (MPC) could dissent on leaving the Bank rate on hold.

It would be the first split vote on rates since July 2011. But the voting numbers will not be disclosed until later this month when minutes are published.

Rates have been left at the historic low of 0.5% since the height of the financial crisis in 2009 to try to nurse the economy back to health.

But the accelerating recovery has spurred pressure to lift the cost of borrowing back to a more normal level, with recent official figures showing that GDP had finally returned to its pre-recession peak in 2008.

Policy makers must now weigh up when that rise should come, balancing the risk of an uptick in inflation with the danger that increasing rates could throw the recovery off course.

Speculation is focused on whether the MPC will choose to go for a first hike later this year or at the start of next.

The committee’s nine members are divided over whether an early rate rise would derail an upturn. However they remained unanimous last month on leaving policy on hold for the time being.

Next week sees the Bank’s quarterly inflation report when policy makers will present the City with their outlook for the economy - which will be seized upon for clues about when the rate rise will come.

Minutes of recent MPC meetings have disclosed that some members’ views about when to lift interest rates had become “more balanced” in the past few months after years of keeping them on hold.

ING Bank economist James Knightley said economic survey data this week showed that the UK was maintaining its growth momentum in the third quarter.

He said it would “increase speculation that one, possibly two members of the Bank of England’s MPC will be voting for a rate rise at Thursday’s policy meeting”.

However, manufacturing remains well off its pre-crisis peak, with official figures showing growth for June at a weaker than expected 0.3% after a contraction in May, also confirming the worst quarterly performance since last year.

David Kern, chief economist at the British Chambers of Commerce, added: “There are a number of uncertainties still facing the economy, and we would urge the MPC not to jump the gun on interest rates.”

Meanwhile, minutes from last month’s rates meeting disclosed concern about the “striking” weakness in wage growth, which is running at just 0.3% compared to inflation of 1.9% - meaning pay is falling in real terms.

Policy makers want to see more wasteful spare capacity or “slack” in the economy used up before rates can rise but evidence from the labour market appears to paint a contradictory picture.

While wage growth is weak, job numbers are increasing strongly.

Investec analyst Victoria Clarke said there could now be another tweak to the Bank’s “forward guidance” on interest rates to give added emphasis to wage figures.

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