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Bank set to hold interest rates

Published 04/06/2015

Ultra-low inflation has pushed back expectations of when the Bank of England will start to raise rates
Ultra-low inflation has pushed back expectations of when the Bank of England will start to raise rates

The Bank of England is expected to leave interest rates on hold today after its first policy meeting since official figures showed inflation turned negative.

Ultra-low inflation has pushed back expectations of when the Bank will start to raise rates, which have remained at 0.5% for more than six years, while the latest economic data appear to have killed off any chance of a hike coming soon.

The closely-watched CIPS/Markit purchasing managers' index (PMI) survey signalled a sharp slowdown in growth for the dominant services sector last month , pouring cold water on hopes that the pace of the recovery could bounce back in the second quarter after a weak start to the year.

Markit chief economist Chris Williamson said the overall lacklustre picture for growth "effectively kills off the chances of any imminent hiking of interest rates by the Bank of England".

Meanwhile, official figures showed Consumer Price Index (CPI) inflation fell to minus 0.1% in April, in line with the Bank's expectations.

But rate-setters expect it to turn "notably" higher at the end of this year and must keep an eye on its path further down the track as it tries to avoid CPI accelerating past its 2% target.

In its quarterly inflation report last month, the Bank broadly indicated that it was likely to hike the cost of borrowing in the middle of 2016.

But "hawks" on the nine-member monetary policy committee (MPC) argue that the question of whether to raise rates now or leave them on hold is "finely balanced".

Two members voted for a hike for a number of months at the end of last year but, since then, sinking inflation has seen a return to all nine members agreeing to leave rates as they are.

The Bank will also want to avoid knocking the recovery off course amid signs that it is already slowing down.

Recent official figures confirmed that gross domestic product (GDP) growth slowed to 0.3% in the first quarter, its worst performance since the end of 2012.

The Bank has said it expects this to be revised up, but in its latest economic forecasts, published last month, it slashed its expectation for growth over 2015 as a whole from 2.9% to 2.5%.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "Once again, the Bank of England seems a nailed-on certainty to keep interest rates at 0.5% at its June policy meeting."

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