Bank of England leaves interest rates on hold

The Bank of England.

The Bank of England. - Credit: PA

Interest rates were left at their emergency rate of 0.5% today, meaning they have been unchanged for the entire period of the coalition Government.

The latest Bank of England decision is the last before the General Election and comes amid expectations that rates will stay on hold until next year because inflation is currently at zero and predicted to turn negative.

Rates have been at their current record low since March 2009, despite the upturn in economic fortunes over the last couple of years.

Rate-setters have also been concerned by uncertainty ahead of next month’s poll as well as the performance of the wider economy, offsetting recent figures showing growth of 2.8% last year - better than previously thought.

Other data have been mixed. Purchasing managers’ index (PMI) surveys this week indicated accelerating growth in manufacturing and services sectors last month, but construction losing momentum.

Overall, the PMI figures pointed to growth picking up to 0.7% for the first quarter, up from 0.6% in the last three month of last year.

But official figures for January have been less rosy, with all three main sectors, including the powerhouse services sector which represents three-quarters of output, going backwards.

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Meanwhile, hopes for a pick-up in pay growth have suffered a setback as wage growth has stalled.

Bank of England policymakers must try to avoid knocking the recovery off course with any rate hike, as well as trying to bring inflation back up to its 2% target.

Chief economist Andy Haldane has even suggested that a rate cut is as likely as a rise, though subsequent remarks from the other members of the nine-strong Monetary Policy Committee (MPC) indicate he is in the minority.

The Bank looks as though it will have to keep interest rates low for longer to ward off the threat of a damaging spiral of low or negative CPI.

Low inflation, driven by temporary factors such as the slide in oil prices, is for the moment seen as broadly positive by politicians and officials, because it gives consumers more spending power to boost the economy.

Retail sales figures for February showed a steeper-than-expected rise of 0.7% as shoppers appeared to be spending the windfall from lower food and petrol prices.

But there is a fear that if negative inflation becomes entrenched, consumers could delay spending and firms put off investment.

In addition, servicing repayments on debts such as mortgages would become more expensive in real terms, especially if wages fall.

Bank of England governor Mark Carney has described the threat of this as a “clear and present danger” to the UK’s debt-laden households and businesses.