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Interest rates set to stay on hold

Published 09/07/2015

Rates have remained unchanged at 0.5% for more than six years
Rates have remained unchanged at 0.5% for more than six years

Interest rates are expected to remain on hold today when the Bank of England delivers its latest policy decision, a day after Chancellor George Osborne's emergency summer Budget.

Rates have remained unchanged at 0.5% for more than six years and are not expected to rise until next year.

The Bank's Monetary Policy Committee (MPC) is likely to weigh up developments such as accelerating wage growth and upward revisions to the UK's economic performance against fears over Greece and disappointing manufacturing figures.

Howard Archer, chief UK and European economist at IHS Global Insight, said it was "once again certain to keep interest rates on hold at 0.5%".

"Even if the Bank of England was close to an imminent interest rate hike (which we doubt it is), it would be highly unlikely to act the day after the budget," he said.

"The MPC will want to closely study Chancellor George Osborne's plans and how they are likely to affect the growth and inflation outlooks."

The pressure for any imminent need for a rate rise has been removed by the fact that inflation remains near historic lows, at 0.1%, well below the Bank's target of 2%.

But the committee must also consider the path that inflation is likely to take over the next couple of years.

So-called "hawks" more likely to be in favour of an interest rate hike sooner will have been encouraged by latest wage data showing annual pay rises climbing to their highest rate for nearly four years.

Meanwhile revised official figures last week showed the economy grew by 3% in 2014 (up from 2.8%) and by 0.4% in the first quarter of 2015 (up from 0.3%), another factor that could be seen as putting upward pressure on prices.

The latest forecast from the Office for Budget Responsibility (OBR) has slightly revised down the expectation for 2015 to 2.4% from 2.5% though the OBR still expects steady expansion over the next five years.

On the downside - and likely to weigh on the side of MPC's "doves" - official figures this week showed the beleaguered manufacturing sector shrinking for a second month in a row in May.

Meanwhile, Bank governor Mark Carney has warned that the outlook for UK financial stability has worsened because of the crisis over debt-laden Greece - facing a euro exit if it cannot agree tough measures to help unlock a bailout package.

Investec economist Chris Hare said: "All told, developments on the month are unlikely to see a shift in MPC voting, but further evidence of wage pressures might see the hawks calling for rate rises later this year."

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