Bank Of England Puts Interest Rate Rise On Hold Again

Photo of author
Written By Hasan Rezazadeh

The Bank of England is still keeping savers and borrowers guessing about when interest rates might increase.

The rate-fixing monetary policy committee met this week and decided to stick at the record low of 0.5% for another month.

The rate has not changed from the record low since March 2009.

Economists, fund managers and investors were expecting some movement this month after Bank of England governor Mark Carney has hinted the only way for rates is up for some months.

But stubborn inflation stuck at arounds 0.1% for some months and a slight slowdown in economic growth is forcing the committee to stay their hand.

Carney and his colleagues have often stated they would like to see inflation running at around 2%. The latest rate-fixing vote was 8-1 in favour of sticking at 0.5%.

New normal on the way

“The rate will rise at some time, but the increase will be gradual and is unlikely to rise past the new normal of between 3% and 5%, which is much lower than in previous economic cycles,” said a Bank spokesman.

“However, we are making no promises and will act when we think the economy is in the right place to handle an increase in borrowing costs.”

The Bank was widely expected to follow last month’s 0.25% rate hike to 0.5% by the US Federal Reserve, while many financial experts expect the rate to hit 1.75% by the end of 2017.

Maike Currie, investment director for personal investing at Fidelity International, said: “Investors have speculated about when the Bank of England will follow the lead of the Federal Reserve in raising rates.

Global factors affect decision

“Both central banks are independent and have no formal arrangement to keep rates in tandem, but UK rates tend to follow what happens in America. Historically, the lag has been between six and nine months.”

According to the International Monetary Fund (IMF), the UK is the only developed economy other than the US in a healthy enough state to consider an interest rate increase this year.

Economists and fund managers concede a UK interest rate rise is inevitable this year, but disagree about timing.

Adam Chester, head of economic research at Lloyds Bank, argues global factors are holding back a rate rise.

“Falling commodity prices, the strength of the pound and volatility in stock markets around the world are all factors that the Bank has to consider,” he said. “I expect they are waiting for the dust to settle on recent issues with the Chinese economy before making a decision.”