When will UK interest rates rise?

The Bank of England is anticipated to announce today in its first post-election policy decision that interest rates are to stay on hold at 0.5%.
The inflation report will be accompanied by the publication of Carney’s latest explanatory letter to the chancellor, George Osborne, after inflation slumped to zero, far below the 2% government target.[1]

The expectation that rates will stay lower for longer has been encouraged by the low inflation environment. The March consumer prices index rate of inflation stayed at the 0 per cent recorded in February – despite forecasts falling petrol prices and the supermarket price war would turn the rate negative[2].

According to David Kern of the British Chambers of Commerce, continued low inflation is good news for the British economy, stating that it is occurring at a time “when wage increases are modest and businesses are facing challenges.”

Although Policy Makers are expected to keep rates at the record low of 0.5 per cent, the question remains as to how long rates can stay this low.

Policymakers have agreed with Governor Mark Carney that rates are more likely to go up than down, despite inflation being at a record low of zero. Meanwhile, growth has slowed. According to This Is Money, official figures at the end of the last month showed the total size of the economy increased by just 0.3 per cent in the first quarter of 2015. That was half the 0.6 per cent growth rate seen in the previous quarter and the worst performance since late 2012.

These figures have fuelled speculation that interest rates will not rise until next year at the earliest having been frozen at 0.5 per cent since March 2009. A first move upwards for rates is expected by most analysts in the first quarter of 2016.

Howard Archer, economist at the consultancy IHS Global Insight said:
“We suspect that the Bank of England will take the view that the recent slowdown in UK economic activity has been significantly influenced by increased business and (to a lesser extent) consumer caution ahead of the general election”.

Official figures this week will also provide some clues to the economic outlook. Manufacturing data is published on Tuesday and labour market numbers are due on Wednesday.

[1]Bank of England to leave interest rates at 0.5% Katie Allen, The Guardian
[2]When UK rates rise Simon Lambert, This Is Money