Economy: Bank of England leaves interest rates on hold again

The Bank of England.

The Bank of England. - Credit: PA

Interest rates were left on hold at 0.5% today as policy makers met for the first time since Bank of England governor Mark Carney warned that they could rise sooner than markets had thought.

The warning in the governor’s annual Mansion House speech last month saw some analysts bring forward expectations of a rate hike to as early as this year.

Minutes from recent meetings of the monetary policy committee (MPC) have indicated its members’ views were becoming more balanced after five years in which rates have been held at the historic low.

They revealed that MPC members found it “somewhat surprising” that markets thought there was only a low probability of a hike this year

The pace of the UK economic recovery has intensified pressure for a rise but rate-setters have also been urged not to take any action which could put growth in jeopardy by saddling firms with higher borrowing costs.

Earlier this week, the British Chambers of Commerce (BCC) said the Bank should avoid any “hasty” move to raise rates after signs of slowing expansion in some sections of the economy.

Meanwhile, official figures from manufacturing, which remains well below its pre-recession peak, showed a shock 1.3% contraction for the sector in May.

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For now, rates remain where they were, while the MPC has also decided to leave the Bank’s quantitative easing (QE) programme pumping money into the economy unchanged at £375 billion.

Many economists predict the first rate rise will happen in November before gradual rises leave the rate in the region of 2.25% by the end of 2016.

Rates have been at 0.5% since March 2009 and have not risen since 2007. But the pound has recently been at a near-six-year high against the US dollar on forecasts of a rate rise later this year

Policy makers have indicated they want to see the level of “slack” or spare capacity in the economy narrow before they raise interest rates but a fall in average pay from 1.9% to 0.7% has given them more leeway not to do so. Inflation has also been weaker than expected, at 1.5% in May.

James Knightley of ING Bank said today’s rates decision was likely to have been unanimous but one or two members could vote for a small increase next time.

“Nonetheless, we probably need to see some stronger wage numbers before a majority on the MPC are convinced that labour market slack is starting to get much thinner,” he said.

Investec’s Philip Shaw said: “The MPC maintained its stance of policy as widely expected. However, we suspect that this will be the last MPC meeting over which markets will remain so relaxed.”

He said updated forecasts in the Bank’s quarterly inflation report next month “might well act as a catalyst for the more hawkish members of the committee to contemplate voting for a tightening”.

David Kern, chief economist at the BCC, said: “The MPC has made the right decision to keep interest rates and quantitative easing on hold.

“However, repeated calls for early interest rate increases and inconsistent messages from the MPC are hampering the efforts of businesses to sustain the recovery.”