Update: Interest rates stay on hold at 0.5% despite emergence of split opinion on MPC

A view of the Bank of England, in the City of London. A view of the Bank of England, in the City of London.

Thursday, September 4, 2014
2:24 PM

Interest rates were again held at 0.5% today as policymakers met for the first time since divisions appeared in their views about when to raise them.

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The first move by the Bank of England on rates since early 2009 is expected within months, with November or February seen as the most likely dates.

Last month, two members of the bank’s Monetary Policy Committee (MPC) argued for an increase from 0.5% to 0.75% but were outvoted by seven others including governor Mark Carney.

A rate rise would put pressure on household finances with a 0.25% hike likely to translate to an annual increase of £250 on a typical mortgage.

The likelihood of an increase before the end of the year had appeared to ebb in recent weeks as figures showed inflation dropped to 1.6% in July, while a 0.2% fall in pay, the first decline since 2009, emphasised the pressure still facing households.

At the same time, the Bank of England said it would take greater account of pay when deciding on when to raise rates. There have also been suggestions of a cooling off in the housing market boom.

But minutes of August’s MPC meeting showing the split vote caused some to believe the possibility of a rate rise in 2014 was still open.

The two dissenters, Ian McCafferty and Martin Weale, argued that despite weak pay growth, the Bank’s actions ought to anticipate its inevitable rise, adding that a rate of 0.75% would still be “extremely supportive” to the economy.

The rate rise speculation has been further fuelled by strong monthly figures from the services and construction sectors this week.

Policymakers have been considering a hike in order to rein in possible inflationary worries further down the track. But there are fears that raising rates too soon could hamper growth, with sectors such as manufacturing and construction still below pre-recession level.

The members of the MPC In favour of a rate rise believe it would help the Bank stick to its aim of making only gradual increases later.

Investec chief economist Philip Shaw said he expected a rise in November, arguing that a rise was on its way and history suggested this was unlikely to come too close to the general election in May.

He said: “There is typically a preference, if possible, to avoid monetary policy becoming a political football in an election campaign.”

In contrast with expectations for a rate rise in the UK, eurozone interest rates were today slashed to 0.05% in the latest bid to breathe new life into the continent’s moribund economy amid the threat of a deflationary spiral.

The European Central Bank (ECB), led by Mario Draghi, came under pressure to act after inflation sunk to 0.3% last month.

Growth across the 18-nation bloc had already ground to a halt in the second quarter as fears over the Ukraine crisis hit confidence.

The ECB had already cut interest rates from 0.25% to 0.15% in June but has now decided that even stronger medicine is needed, as it cut growth forecasts for this year and next.

It also cut the overnight deposit rate for lenders that hold money with it to -0.2% – a rate that had already been slashed below zero to -0.1%.

Mr Draghi said that in addition, the bank would start a new stimulus programme buying asset-backed securities.

The decision saw the euro plunge by nearly 1% against the US dollar while sterling climbed a cent against the single currency.

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