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Interest rates to remain unchanged

Published 10/05/2015

The Bank of England is due to announce its first post-election policy decision
The Bank of England is due to announce its first post-election policy decision

Interest rates look set to stay on hold at 0.5% tomorrow when the Bank of England announces its first post-election policy decision.

Rates have been at the historic low for six years and the slide in inflation to zero has pushed back expectations for the timing of a hike into 2016.

The Bank's Monetary Policy Committee (MPC) will announce its latest decision on Monday having met on the day of the poll on Thursday and on Friday.

Vicky Redwood, chief UK economist at consultancy Capital Economics, said: "We doubt that the Monetary Policy Committee would want to change monetary policy so close to a general election."

There had been some developments suggesting a rise could come sooner, she acknowledged.

Consumer Price Index (CPI) inflation was at zero in February and March - rather than turning negative as some expected - meaning it might now have avoided this risk.

Meanwhile minutes of the April meeting of the Monetary Policy Committee (MPC) suggested a "hawkish" turn as it pointed to the possibility that inflation might recover more quickly than previously expected.

However, a slowdown in economic growth to just 0.3% in the first quarter combined with weak US performance could weigh against any optimism that the recovery will not be held up by a rates hike.

"We think that a hike will be delayed until next year and that rates will rise more slowly than most economists expect," Ms Redwood said.

Two days after the rates announcement markets will focus on the Bank's quarterly Inflation Report giving its latest thinking on the outlook for the UK economy.

Wednesday will also see the publication of a second letter from governor Mark Carney to the Chancellor explaining why inflation is more than 1% off its 2% target. Inflation has continued to slide since the previous letter in February.

Both report and letter will be scrutinised for clues on the path for interest rates after minutes of the MPC's latest rates meeting appeared to indicate that inflation might recover more quickly than previously expected.

The Bank has said it expects CPI, which has been under pressure amid the sliding cost of oil and the supermarket price war, to turn negative "at some point the coming months".

However the latest meeting also said another cause of low inflation - the strength of the pound making imports cheaper - may have been feeding through to CPI more quickly than expected - meaning that a bounce-back could also come sooner.

A faster than expected rise in CPI would put pressure on the MPC to consider a rates hike in order to keep inflation under control further down the track.

However, Bank chief economist Andy Haldane has recently floated the likelihood of a rates cut to try to stave off a damaging spiral of falling prices - though he seems to be a lone voice among policy makers.

Mr Carney has acknowledged that the tool of a rate cut is in his armoury should deflation persist but has played down the possibility of having to use it.

Philip Shaw of Investec said that after last month's "hawkish surprise" from the MPC minutes, the Bank's inflation report "could conclude that inflation will be slightly above the 2% target in two to three years' time".

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