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Interest rates are held despite UK emerging from downturn


Bank of England Governor Mark Carney

Bank of England Governor Mark Carney

Bank of England Governor Mark Carney

Interest rates have been held at 0.5% as Bank of England policymakers met for the first time since figures showed the UK had emerged from the six-year downturn.

Signs of the continued strength of the recovery fuelled speculation that some rate-setters on the Bank's nine-member monetary policy committee (MPC) might have voted for a hike.

But an overall vote in favour would have surprised markets, with analysts focusing instead on the prospect of a rise towards the end of this year or early next year.

Second-quarter gross domestic product (GDP) figures last month showed the UK had finally emerged from its worst downturn since the Second World War as output surpassed its pre-recession peak in early 2008.

Since then, survey data indicating strong growth in the dominant services sector has added to pressure for a rate rise – though a weaker performance for Britain's beleaguered manufacturers has led to calls for caution.

Meanwhile, there have been conflicting signals from the labour market, with employment growing strongly but weak wage growth of just 0.3% compared to inflation of 1.9%, which means real-terms pay is continuing to fall.

The signs of economic improvement have led some experts to speculate that one or two members of the MPC could dissent on leaving the Bank rate on hold.

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It would be the first split vote on rates since July 2011. But the voting numbers will not be disclosed until later this month when minutes are published.

Rates have been left at the historic low of 0.5% since the height of the financial crisis in 2009 to try to nurse the economy back to health.

But the accelerating recovery has spurred pressure to lift the cost of borrowing back to a more normal level.

Policymakers must now weigh up when that rise should come, balancing the risk of an uptick in inflation with the danger that increasing rates could throw the recovery off course.

During a visit to Northern Ireland at the end of June, Bank of England Governor Mark Carney said any interest rate increases would be "limited increases...at a gradual pace". "The exact timing of the start of that process will be determined by the evolution of the economy and we will be watching the data closely."

Minutes last month revealed committee members were divided on whether an early hike would derail an upturn, though they remained unanimous on leaving policy on hold for the time being.

Next week sees the Bank's quarterly inflation report when policymakers will present the City with their outlook for the economy – which will be seized upon for clues about when the rate rise will come.

James Knightley of ING Bank, said: "The growth story remains very positive and the economy continues to add jobs in significant numbers, but with wages barely growing and the degree of slack in the labour market still looking uncertain, the Bank of England is content to leave policy unchanged."