Rates expected to remain on hold

Thursday 10 July 2014

Interest rates are expected to remain on hold today as policymakers weigh up the mounting arguments for a first change in more than five years.

This week's meeting of the Bank of England's monetary policy committee (MPC) is the first since governor Mark Carney's warning in his annual Mansion House speech that rates could rise sooner than markets were expecting.

Minutes from the last two meetings have shown that some members believe the arguments for raising rates have become more balanced as the UK economy recovers and the unemployment situation improves. Many economists predict the first rate hike will happen in November before gradual rises leave the rate in the region of 2.25% by the end of 2016.

Rates have been at 0.5% since March 2009 and have not risen since 2007. This month's decision of the MPC will be announced at noon.

The pound is at a near-six year high against the US dollar on forecasts of a rate rise later this year, although this momentum was jolted on Tuesday by unexpectedly weak output figures from the manufacturing sector.

The Bank has also been given leeway by sig ns of more slack in the labour market than previously thought, following a fall in growth in average pay from 1.9% to 0.7%. Inflation has also been weaker than expected, at 1.5% in May. The Bank expects growth of 0.9% in the second quarter, easing back to 0.7% in the third quarter following growth of 0.8% in the first three months of 2014.

Samuel Tombs, senior UK economist at Capital Economics, said: "We suspect that the vote to leave the Bank rate on hold will be unanimous once again.

"And while a rate hike before the end of the year cannot be ruled out if the recovery accelerates, the likely weakness of inflation means that there is a good chance the MPC sits on its hands until early 2015."