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Bank set to hold rates at record low as US poised for rise

Published 10/12/2015

The Bank of England has been keeping interest rates at a record low of 0.5%
The Bank of England has been keeping interest rates at a record low of 0.5%

Bank of England policymakers are expected to keep interest rates at record lows, but the decision comes as the US Federal Reserve is poised to make its first increase in nearly a decade.

The Bank signalled in its quarterly inflation report last month that an interest rate rise in the UK may still not come for another year, while monetary policy in the US and Europe is moving in completely opposite directions.

Mario Draghi, president of the European Central Bank, last week announced a cut to overnight deposit rates from minus 0.2% to minus 0.3% and extended a 60 billion euro (£43 billion) stimulus programme by six months.

Meanwhile, Federal Reserve chair Janet Yellen has indicated that a rise in US rates is a near certainty when America's policymakers decide on December 16.

The rise in US rates would be the first since 2006 and there are fears it will trigger market disruption, also coming at a time when the global economy and China's growth have been slowing.

Bank of England governor Mark Carney has already said a decision to raise rates in the US is "not decisive" for UK policymakers, stressing any such move on these shores will be made according to UK economic conditions.

This month's meeting of the Bank's nine-strong Monetary Policy Committee (MPC) comes at a time when the economy still faces some challenges.

And with inflation remaining in negative territory - at minus 0.1% in October - there is little rush for the MPC to pull the trigger on a rate rise.

Last week's PMI surveys suggested growth in the dominant services sector jumped to a four-month high in November , but this was in contrast to readings for the other sectors of the economy, which showed manufacturing activity easing and expansion in the construction sector falling to a seven-month low.

Official figures earlier this week revealed that manufacturing output dropped by 0.4% month-on-month in October - worse than expected and a sharp reversal of the 0.9% rise in September.

The British Chambers of Commerce (BCC) warned over the UK's reliance on consumer spending to drive growth as it downgraded its forecast for gross domestic product (GDP) growth for 2015 and the next two years.

Most economists still expect growth in GDP to pick up in the fourth quarter, to around 0.6% from 0.5% in the previous three months.

Expectations for when the first UK rate rise will eventually come vary significantly, although most believe a hike will be made before 2017 - at odds with forecasts in the Bank's own November inflation report.

MPC member Ian McCafferty has been the lone policymaker calling for a rise since August and is unlikely to be joined by fellow rate-setters this month.

The BCC believes rates will rise in the third quarter of 2016, although it stresses that global economic woes could push it back further, while Investec Economists are pencilling in a rise in the second quarter of next year.

Howard Archer at IHS Global Insight said: "We believe the Bank of England is more likely than not to edge interest rates up from 0.50% to 0.75% sometime in the first half of 2016.

"We suspect that decent UK economic growth, stronger earnings growth overall and consumer price inflation gradually trending up will prompt the MPC to act around May."

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