News

Bank of England vote to keep interest rates on hold

The Bank of England (BoE) has cut its forecast for economic growth and unanimously voted to keep interest rates at 0.5% for at least another year [1].

Markets and economists believed that rates would rise towards the end of the year, although this now seems unlikely.

Governor Mark Carney has warned borrowers against getting too comfortable with rock-bottom rates, saying that after almost seven years at a record low of 0.5%, interest rates were “more likely than not” to need to go up over the next two years [2].

He also cautioned against repeating the mistakes of the past, when rate rises had come as a shock to indebted households and businesses, and said he wanted to send a clear message to households: “We are trying to inform the markets and, most importantly, households and businesses in this country, what’s likely to happen on rates” [2].

With inflation still more than 1% off the BoE’s 2% target, Carney had to write another letter to Chancellor George Osborne to explain his reasoning behind the decision [3].

In the letter, Carney explained that low inflation was mostly due to falling commodity prices, with the oil price down by another one-third since November [3].

Carney also highlighted that the UK financial system was resilient and in a position to cope with any upcoming shocks.

Deputy Governor, Ben Broadbent, has said there are some signs that low inflation is restraining wage growth, and reiterated that policy makers are in no hurry to increase interest rates.

Speaking on BBC Radio on Friday, Broadbent said there is “no urgency” to raise the benchmark rate from a record low [4].

He presented an optimistic picture of the domestic economy, saying cuts to the BoE’s growth forecasts had been small and that core inflation, a measure that strips out volatile food and energy prices, had moved higher.

“We’ve seen a pretty solid recovery, we’ve got record employment,” Broadbent said. “While there’s no certainty, no great urgency to raise interest rates at the moment, nor do I think we’re in a place where we’re having immediately to ease it” [4].

 

[1] The Telegraph. ‘Carney downgrades UK growth prospects as rate rise kicked into long grass’. telegraph.co.uk

[2] The Guardian. ‘Bank of England votes 9-0 to keep interest rates on hold’. theguardian.com

[3] BBC News. ‘Bank of England cuts growth forecast’. bbc.co.uk

[4] Bloomberg. ‘BOE’s Broadbent sees signs low inflation holding back wages’. bloomberg.com