Bank of England keeps interest rates on hold
Published 07/08/2014 | 14:03
Interest rates were held at 0.5% today 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 in the next.
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.
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.
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 BoE is content to leave policy unchanged.
"At the same time, inflation has risen more quickly than expected, house prices continue to move sharply higher, confidence is strong and spare capacity in the economy is being eroded.
"As such, we would expect to see one, possibly two members of the MPC having voted for a rate hike at today's meeting, but we won't find that out until the minutes are released."
Chris Williamson, chief economist at Markit, said: "It's reasonable to assume that the debate has continued to intensify as to whether interest rates should start rising from their record low and that we're getting closer to the first tightening of policy since prior to the financial crisis.
"The Bank has made it clear that the debate hinges on whether household finances remain too vulnerable to cope with higher borrowing costs, despite the economy's impressive recovery over the past year."
Howard Archer, chief UK and European economist at IHS Global Insight, said: "Considerable doubt persists as to whether the Bank of England will lift interest rates from 0.50% to 0.75% late on in 2014 or hold fire until the early months of 2015."
A yes vote in the Scottish independence referendum would be highly likely to delay any hike because of the uncertainty it would create, he added.
David Kern, chief economist at the British Chambers of Commerce, said: "The MPC made the right decision to keep interest rates and quantitative easing on hold.
"The UK's economic recovery remains on track but is still facing challenges and this is not the time to put it at risk with premature rate increases. The current calls for higher rates, particularly while wage pressures are still weak, are unjustified."
The pound was unchanged at 1.685 US dollars.
TUC general secretary Frances O'Grady said: "The Bank is right to hold interest rates, and they should not increase until the recovery is sustained and workers start to see the proceeds in their pay packets.
"Raising interest rates now would choke off the recovery. While households are still trapped in the longest living standards squeeze for over a century, an increase in mortgage payments is the last thing they need."
Citizens Advice chief executive Gillian Guy said: "Households who are just about keeping their head above water could get into difficulties if interest rates go up.
"For the economy to continue to recover and households to be able to meet their financial commitments, any increase in interest rates needs to be slow and steady. While a rate rise is inevitable people need time to prepare.
"Raising interest rates will have the greatest impact on mortgages but it could also affect homeowners' ability to cover other costs.
"It's likely that people may not get into mortgage arrears straight away because they get behind with other bills instead or choose to cut spending from elsewhere."