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Interest rates on hold as inflation hovers around zero

By John-Paul Ford Rojas

Published 07/08/2015

Bank of England governor Mark Carney
Bank of England governor Mark Carney

The Bank of England has left interest rates on hold at 0.5% but the prospect of sustained near-zero inflation means a hike is still not likely to come until early next year.

Members of the Bank's Monetary Policy Committee (MPC) voted 8-1 to leave interest rates on hold this month at 0.5%, where they have remained for more than six years.

Improving pay growth and consumer confidence has convinced some rate-setters that inflation could rise more quickly than expected. The Bank has increased its expectation for annual economic growth this year from 2.5% to 2.8%.

But inflation is being held back in the short-term by the latest plunge in oil prices and the sharp strengthening of the pound, which makes imports cheaper.

The Bank forecasts that inflation will hover around zero for the next few months, with the potential for again turning negative, as it did briefly earlier this year.

For most MPC members, this removes the need to hike rates now in order to keep inflation from overshooting its 2% target in the next couple of years though one official, Ian McCafferty, voted to increase rates by 0.25% to 0.75%.

It was the first dissent since a series of 7-2 split votes at the end of 2014.

The Bank published minutes of the MPC rates meeting at the same time as issuing the decision itself, as well as its quarterly Inflation Report.

It appeared to endorse market expectations which have pencilled in the timing of an interest rate rise for next spring ­- unchanged from the timing indicated at the Bank's previous inflation report, though the rise in rates after that is seen as being slightly steeper.

The report could dampen expectations that a rate hike could come as soon as the end of this year, which have been heightened by recent remarks by officials, including Bank of England governor Mark Carney.

Rates have remained unchanged since they were cut to 0.5% in March 2009 to prop up the UK economy at the height of the recession, but the recovery has spurred expectations that they will need to be increased soon.

An increase will add to repayment costs for borrowers such as mortgage holders but offer a glimmer of hope to savers whose nest eggs have been steadily eroded by more than six years of low rates.

Belfast Telegraph

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