Interest rate set to remain at 0.5%

Sunday 02 February 2014

Interest rates are set to remain on hold again this week, marking nearly five years of the cost of borrowing being kept at the record low of 0.5%.

Bank of England policymakers have already said they are in no hurry to raise interest rates, even if unemployment falls back to their 7% threshold. Minutes of the Bank's meeting in January revealed that members of the nine-strong Monetary Policy Committee (MPC) saw "no immediate need to raise rates'' regardless of falling unemployment, which is now just a whisker away from the target set under its forward guidance policy.

The sharp fall in unemployment means the Bank is likely to adapt its forward guidance policy when it publishes its inflation report on February 12.

The unemployment rate dropped to 7.1% in the three months to November from 7.4% in October and from 7.6% in the quarter to September.

Policymakers have been keen to stress that the cost of borrowing will be kept on hold to support the recovery, given that growth is still below its pre-financial crisis levels despite the recent pick-up in activity.

Governor Mark Carney told business leaders in Davos last month that the recovery had ''some way to run'' before a hike in interest rates would even be considered, adding that there were a ''range of options'' to tweak the guidance.

GDP increased by 1.9% in 2013 and has now recovered the lion's share of output lost in the recession, but a slowdown in quarterly growth to 0.7% from 0.8% in each of the previous two periods has offered some breathing space on rates.

Howard Archer, chief economist at IHS Global Insight, said he expects the Bank to hold off from raising rates until the second quarter of 2015.

He added: "We anticipate that the Bank of England will want to give the economy as much chance as possible to establish broad-based growth, assuming that there are no nasty inflation shocks. In fact, the inflation outlook is currently looking more benign than it has for some time."