Interest rates expected to remain low 'until 2015'

6 April 2014

Bank of England rate-setters are expected to leave the cost of borrowing on hold this week amid signs that the pace of the recovery may be slowing down.

Several economists believe the Bank's Monetary Policy Committee (MPC) will not lift interest rates from 0.5% - where they have been held since 2009 - until next year.

They have been held at the low level to help nurse the economy back to health.

The Bank had previously pledged not to lift them until a fall in unemployment to 7% although that "forward guidance" policy has now been abandoned after joblessness declined more quickly than had been expected as growth picked up speed last year.

However, gross domestic product remains below its pre-recession level six years ago.

Rate-setters are now using a new "fuzzy" guidance linking monetary policy to a more opaque measure of how far the economy is running below its capacity. They have indicated that more sustainable growth is needed before any hike.

Latest monthly survey figures from the three main sectors of the economy are unlikely to shake the MPC from its caution over the state of the recovery.

They showed that while construction, manufacturing and services were all continuing to grow robustly in March, the pace of expansion had slackened off, indicating that the recovery had slowed to its weakest pace in nine months.

Falling inflation, with the Consumer Prices Index (CPI) rate at 1.7% comfortably below the Bank's 2% target, also gives leeway to the Bank to leave interest rates on hold.

The MPC holds a shortened meeting this week, on Wednesday only instead of over two days, with its decision announced on Thursday. This is to allow some members to attend International Monetary Fund meetings in Washington.

Investec economist Philip Shaw said the shortening of April's meeting was telling in indicating that very little looks set to change this month.

He said: "For now with the economy growing respectably but not roaring away, we see it likelier than not that the MPC will avoid tightening policy this year, especially with CPI inflation expected to remain below target over the medium term."

Howard Archer of IHS Global Insight said: "The MPC is not taking sustained recovery for granted and very much wants to see it become more balanced with business investment seeing sustained improvement and exports increasingly kicking in.

"There are some signs that the UK economy may recently have lost a little momentum, although it still appears to be growing at a healthy clip."

Last week, Bank governor Mark Carney refused to rule out a pre-election rise in interest rates, but stressed that any rise would be gradual.

He added that despite unemployment falling more quickly than expected, there remained "slack" in the labour market "right across the country", more of which needed to be used up before any hike.

Mr Carney told a newspaper the recovery in the economy had been "uneven" and needed to be seen across the country.

Martin Weale, a fellow member of the MPC, has previously indicated that a rise in the cost of borrowing was likely next spring, and appeared to suggest it would come before the May general election.

Interest rates expected to remain low 'until 2015'

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