Bank to decide on interest rates

Friday 09 January 2015

The Bank of England is expected to leave interest rates on hold today following its first monetary policy meeting of the year.

Low inflation - partly caused by sliding oil prices - together with concerns about the recovery mean experts see little reason for the Bank to hike the cost of borrowing. It should mean the Monetary Policy Committee (MPC) leaving rates unchanged at 0.5%, where they have now been held for nearly six years, since March 2009.

Markets are instead likely to focus their attention on the European Central Bank amid signs that it is preparing to embark on a money-printing quantitative easing (QE) programme after the eurozone plunged into negative inflation. Policy makers on the continent have already slashed interest rates to 0.05% and are now thought likely to start buying government bonds to stimulate the economy in a similar way to the US and UK's QE schemes of recent years.

Latest figures show inflation fell to minus 0.2% for the single currency bloc in December, the first time it has been negative since the height of the global financial crisis in 2009. The slide into deflation, spurred by the oil fall, is a concern because it reflects weakness in the economy and can if sustained lead to a deflationary spiral as consumers put off purchases in the hope prices will go down.

In the UK, inflation fell to a 12-year low of 1% in November and is expected to fall further after the price of a barrel of Brent crude tumbled to below 50 US dollars - from a high of nearly 116 US dollars in June.

Samuel Tombs of consultancy Capital Economics said that while outright deflation remained unlikely in Britain, Consumer Price Index (CPI) inflation could drift as low as 0.5% in the next few months.

He said this month's MPC meeting was unlikely to see any more members of the nine-strong committee joining the two dissenters Ian McCafferty and Martin Weale who have for five months been voting for a 0.25% hike.

Signs of a slowdown in economic growth also weigh against an increase, with latest survey data from December pointing to fourth quarter gross domestic product (GDP) growth likely to slip to 0.5%, from 0.7% in the previous period.

Official figures last month showed the recovery during 2014 had been slower than previously thought, with GDP in the third quarter 2.6% ahead on the same period in 2013, down from an earlier estimate of 3%. The figures also showed the UK was increasingly reliant on household spending, damaging hopes for a rebalancing of the economy as business investment shrank.

Meanwhile the uncertainty surrounding May's general election adds to reasons for the MPC to hold fire, Mr Tombs said.

However, he argued that policy makers looked likely to "look through" the effects of external developments such as oil prices to bring the prospect of a hike before the end of the year closer - earlier than many expect - amid signs of stronger wage growth.

Mr Tombs said: "Heightened uncertainty regarding how weak inflation will be in 2015 and signs that the recovery has become less broad-based are likely to mean that the MPC keeps interest rates on hold at January's meeting and throughout the first half of 2015. But signs that wage growth is starting to strengthen and labour market slack is continuing to decline suggest that a move to raise Bank Rate before the end of this year remains on the cards."