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Interest rates decision due amid split vote speculation

Published 02/08/2015

Mark Carney said that a decision about a rise in interest rates would 'come into sharper relief around the turn of this year'
Mark Carney said that a decision about a rise in interest rates would 'come into sharper relief around the turn of this year'

The Bank of England will announce its latest interest rate decision this week amid speculation that there will be a split vote among officials for the first time this year.

Rates are expected to remain at 0.5% for now, where they have stayed for more than six years, but recent remarks from bank officials have fuelled expectations that there could now be a hike before the end of 2015.

Economists had previously been expecting an increase in rates in the middle of 2016 but Bank governor Mark Carney said in a speech that a decision about a rise would "come into sharper relief around the turn of this year".

This week's decision by the bank's Monetary Policy Committee (MPC) will, for the first time, be published at the same time as the minutes of the MPC's meeting, under changes to the way it makes the process public.

It will also coincide with the quarterly inflation report, giving the latest outlook from Threadneedle Street for the UK economy - leading the date to be dubbed "super Thursday".

Latest projections will be closely scrutinised for clues about whether the MPC may now be considering a rates hike this year.

The bank's last inflation report in May had seen it slash its growth forecast for this year from 2.9% to 2.5% after a weak first quarter when it slowed to 0.4%.

But figures last week showed gross domestic product (GDP) had bounced back with expansion of 0.7% in the second quarter - though there remain concerns about the weakness of manufacturing, with exports held back by the strength of the pound.

The data also signalled another milestone as GDP per head - a measure taking account that the nation's wealth is shared by an expanding population - has now caught up with its pre-recession level at the start of 2008.

Meanwhile, pay growth has accelerated to 3.2%, its strongest pace in five years and ahead of the bank's prediction in May that pay would only rise by 2.5% this year.

Rate-setters will take into account potential pressures lifting costs as they target consumer price index (CPI) inflation at 2%.

Any signs that accelerating growth and wages could drive up CPI more quickly than expected will be seen as an indication that interest rates may have to go up sooner - and could drive the pound higher.

With latest figures showing inflation at zero there is little pressure to do this immediately but policy-makers will have to weigh up the impact of their decisions on the economy over the next couple of years.

They currently expect CPI to start turning higher later this year as the impact of falling oil and food prices fade.

The last set of MPC minutes suggested that rising wages meant some members were leaning towards a hike but were only held back by uncertainty over Greece's debt crisis at the time - which has now faded after it reached agreement with creditors.

This has led to speculation about a split coming this month for the first time since two of the nine-member committee voted for five months in a row at the end of 2014 to raise rates.

But there are also factors suggesting downward pressure on inflation. The price of oil has again fallen back while British Gas has cut energy bills by 5% for a second time.

Also, while the labour market has seen improvement in pay, official data recently showed the first rise in unemployment for more than two years.

In addition, the strength of the pound means the price of imported goods is subdued.

Vicky Redwood, chief UK economist at Capital Economics, said: "This month's MPC vote will probably be split for the first time this year.

"While only a minority will vote for a rate rise, the risk of a hike this year has risen. Indeed, Mark Carney will probably use the inflation report to continue to prepare expectations for a hike.

"But the majority of the committee will want to wait for inflation to pick up before considering a rise."

Howard Archer, chief UK and European economist at IHS Global Insight, said: "We expect at least two - and very possibly three - of the nine MPC members to vote at the August meeting for interest rates to be lifted to 0.75%."

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