Bank of England holds interest rates despite pressure for hike
Interest rates were held at 0.5% yesterday as policymakers met for the first time since divisions appeared in their views about when to raise them.
The first change by the Bank of England on rates since early 2009 is expected within months, with November or February seen as the most likely time.
Last month, two members of the bank's Monetary Policy Committee (MPC) argued for a hike from 0.5% to 0.75% but were outvoted by seven others including governor Mark Carney. A rate rise would put pressure on household finances, with a 0.25% hike likely to translate to an annual increase of £250 on a typical mortgage.
The likelihood of an increase before the end of the year appeared to ebb in recent weeks as figures showed inflation dropped to 1.6% in July, while a 0.2% fall in pay – the first decline since 2009 – emphasised the pressure still facing households. At the same time, the Bank of England said it would take greater account of pay when deciding on when to raise rates. There have also been suggestions of the housing boom cooling.
But published minutes of August's MPC meeting caused some to believe the possibility of a rate rise in 2014 was still open.
The two dissenters, Ian McCafferty and Martin Weale, argued that despite weak pay growth, the bank's actions ought to anticipate its inevitable rise, adding that a rate of 0.75% would still be "supportive" to the economy.
The rate rise speculation has been further fuelled by strong monthly figures from the services and construction sectors.
Policymakers have been considering a hike in order to rein in inflation worries further down the track. But there are fears that raising rates too soon could hamper growth, with sectors such as manufacturing and construction still below pre-recession level.
The members of the MPC in favour of increasing the rate believe it would help the bank stick to its aim of making only gradual hikes later.
Investec chief economist Philip Shaw said he expected a hike in November, arguing a rise was on its way and history suggested this was unlikely to come too close to the general election in May.
And he added: "There is typically a preference – if possible – to avoid monetary policy becoming a political football during an election campaign."