Belfast Telegraph

Thursday 10 July 2014

Interest rates still on hold but rise is coming

The Bank of England may be  forced to raise the cost of borrowing sooner than expected
The Bank of England may be forced to raise the cost of borrowing sooner than expected

The Bank of England has kept interest rates on hold once more amid renewed speculation that it may be forced to raise the cost of borrowing sooner than expected.

Policymakers maintained rates at their record low of 0.5% and kept the Bank's £375bn economy-boosting drive unchanged.

But the strength of the UK's recovery is raising the prospect of a rate hike in 2015 – a year earlier than the Bank predicted under its forward guidance policy.

Experts believe the Bank will need to make significant revisions to its unemployment forecasts as UK growth gathers pace.

Calls are also growing among some economists to raise rates now in the face of surging growth and a buoyant housing market.

UK growth picked up to 0.8% in the third quarter and minutes of the Monetary Policy Committee's (MPC) October meeting showed unemployment was falling and the economy recovering faster than it forecast.

A hat-trick of positive industry surveys in recent days has added to the rosy economic picture, suggesting growth has continued into October across manufacturing, construction and services sectors.

Attention is already turning to the Bank's inflation report next week and expectations for forward guidance to come under further pressure.

Under the Bank's rates pledge, it said it would not consider a rise until unemployment falls from 7.7% currently to 7% – a threshold it said would not be reached until the end of 2016 in its August inflation report.

Financial markets have remained unconvinced and are pencilling in a rise in early 2015.

Alan Clarke, economist at Scotiabank, said the Bank may now be forced to shift its own forecast by as much as 18 months.

Some experts say rates should be raised by 0.25%.

Sir Steve Robson, the former second permanent secretary to the Treasury, and Andrew Sentance, senior economic adviser to PricewaterhouseCoopers and previously a member of the MPC, are among those who think rates should go up to 0.75% to rein in ultra-loose monetary policy.

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